##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549


Form 10-K


FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO


SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.


|           |  |                                                                                              
|---------- |  | ---------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                              
|          
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934.    
|          
|           |  | For the fiscal year ended December 31, 2004                                                  
|          
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934.
|          
|           |  | For the transition period
    from           to                                              

Commission file number: 000-21319


Lightbridge, Inc.


(Exact Name of Registrant as Specified in Its Charter)


|                                                                                         |  |                                     
|---------------------------------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                                                 |  | 04-3065140                          
|(State or Other Jurisdiction of Incorporation or
    Organization)                       |  | (I.R.S. Employer Identification No.)
|                                                                                        
|30 Corporate Drive
    Burlington, Massachusetts(Address of Principal Executive Offices) |  | 01803(Zip Code)                     

(781) 359-4000


(Registrants Telephone Number, Including Area Code)


Securities registered pursuant to Section 12(b) of the
Act: None


Securities registered pursuant to Section 12(g) of the
Act:


common stock, $.01 par value per share


þ o


þ


þ o






DOCUMENTS INCORPORATED BY REFERENCE












---










TABLE OF CONTENTS


|                                                       |  |                                                                                                                      |    |      |    |  |  | 
|------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- |  |  | 
|                                                       |  |                                                                                                                      |    | Page |   
|                                                       |  |                                                                                                                      |    |      |   
|PART I                                                
|Item 1.                                                |  | Business                                                                                                             |    |      | 3  | 
|Item 2.                                                |  | Properties                                                                                                           |    |      | 19 | 
|Item 3.                                                |  | Legal Proceedings                                                                                                    |    |      | 20 | 
|Item 4.                                                |  | Submission of Matters to a Vote of Security
    Holders                                                              |    |      | 20 | 
|                                                      
|PART II                                               
|Item 5.                                                |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |    |      | 20 | 
|Item 6.                                                |  | Selected Financial Data                                                                                              |    |      | 21 | 
|Item 7.                                                |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |    |      | 22 | 
|Item 7A.                                               |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |    |      | 56 | 
|Item 8.                                                |  | Financial Statements and Supplementary
    Data                                                                      |    |      | 56 | 
|Item 9.                                                |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |    |      | 57 | 
|Item 9A.                                               |  | Controls and Procedures                                                                                              |    |      | 57 | 
|Item 9B.                                               |  | Other Information                                                                                                    |    |      | 60 | 
|                                                      
|PART III                                              
|Item 10.                                               |  | Directors and Executive Officers of the
    Registrant                                                               |    |      | 60 | 
|Item 11.                                               |  | Executive Compensation                                                                                               |    |      | 60 | 
|Item 12.                                               |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |    |      | 60 | 
|Item 13.                                               |  | Certain Relationships and Related
    Transactions                                                                   |    |      | 60 | 
|Item 14.                                               |  | Principal Accountant Fees and Services                                                                               |    |      | 60 | 
|                                                      
|PART IV                                               
|Item 15.                                               |  | Exhibits and Financial Statement
    Schedules                                                                       |    |      | 61 | 
|Signatures                                             |  |                                                                                                                      | 65 |     
|Ex-23.1 Consent of Deloitte & Touche  LLP             
|Ex-31.1 Sect. 302 Certification of the C.E.O.         
|Ex-31.2 Sect. 302 Certification of the C.F.O.         
|Ex-32.1 Sect. 906 Certification of the C.E.O. & C.F.O.








2



---



##### Table of Contents






PART I







|        |         
|------- | --------
|Item 1. | Business













3



---



##### Table of Contents















4



---



##### Table of Contents



Business Segment Data






Products and Services


Payment Processing Services






|                 |  |                                                                                                                                                                                                                                                                                                 
|---------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Solutions Groups |  | Functions                                                                                                                                                                                                                                                                                       
|                
|Core Solutions   |  | The payment gateway allows IP-enabled merchants to accept credit
    card payments via web sites and mobile devices or from retail
    storefronts and MOTO merchants.                                                                                                                          
|                
|                 |  | The Virtual Terminal and Batch Upload allow merchants to
    authorize, process, and manage credit card transactions manually
    from any computer that has an Internet connection and a web
    browser.                                                                                      
|                
|                 |  | The Merchant Interface is a secure web site that allows
    merchants to view and manage transactions and other details of
    their accounts, including activity reports and authorizations
    for purchases, credits and returns.                                                            
|                
|                 |  | The Advanced Integration Method (AIM) is a
    merchant-initiated server-to-server connection for submitting
    CNP transactions to the payment gateway.                                                                                                                                     
|                
|                 |  | The Simple Integration Method (SIM) provides a
    solution for CNP merchants with basic customization needs where
    the payment gateway handles all steps in the secure transaction
    process.                                                                                           
|                
|                 |  | Although in most cases, CP retail and mobile merchants simply
    purchase a ready-to-install POS solution or device that is
    integrated in the payment gateway, those that wish to integrate
    to the payment gateway directly can use a CP application
    programming interface (API).
|                
|                 |  | Daily transaction settlement and two-to-three day transaction
    funding time.                                                                                                                                                                                                                 

5



---



##### Table of Contents





|                    |  |                                                                                                                                                                                                                                                                                                      
|------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Additional Services |  | eCheck.Net® allows CNP merchants to authorize and process
    electronic check transactions directly from a web site or
    through the Virtual Terminal.                                                                                                                                            
|                   
|                    |  | Fraud Detection Suite
    (FDStm)
    allows web merchants to identify, manage, and reduce fraudulent
    transactions with a customizable, rules-based solution.                                                                                                                                  
|                   
|                    |  | Automated Recurring
    Billingtm
    (ARB) provides a system for CNP merchants to
    automatically handle regularly recurring billings or
    subscriptions according to a specific billing interval and
    duration.                                                                           
|                   
|                    |  | Cardholder Authentication Programs implement, for the benefit of
    merchants that sell products or services online, the Verified by
    Visa® and MasterCard®
    SecureCodetm
    programs for reducing liabilities and expenses of merchants
    arising from unauthorized use of credit cards.  
|                   
|                    |  | FraudScreen.Net®, provided under agreement with Fair Isaac
    Corporation, provides CNP merchants with strategies and customer
    service tools to help protect themselves from fraudulent
    transactions using neural net technologies. The Company no
    longer actively markets this product.
|                   
|                    |  | SalesBoost.Net, provided under agreement with eBoz, Inc., is an
    integrated suite of fifty web promotion tools designed to boost
    CNP merchants sales by attracting shoppers to their web
    sites.                                                                                          



| |                          
| | -------------------------
| | Payment Gateway Solutions











| |                   
| | ------------------
| | Account Management



6



---



##### Table of Contents







| |                   
| | ------------------
| | Connection Methods





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | AIM is a secure, merchant-initiated server-to-server connection
    for submitting transactions to the payment gateway. AIM provides
    merchants with control over each phase of the customers
    online transaction experience, including the payment form and
    receipt page. AIM employs industry standard secure data
    encryption technology  128-bit SSL protocol.
    Additional features include: transaction key authentication,
    merchant control over all phases of the customers online
    transaction experience, and configurable transaction response
    that integrate with merchant enterprise applications.
|
| |  | SIM is a solution for web merchants with basic customization
    needs. The Authorize.Net payment gateway handles all the steps
    in the secure transaction process  payment data
    collection, data submission and the response to the customer.
    Additional features of SIM include: a payment gateway hosted
    payment form employing 128-bit SSL data encryption, transaction
    digital fingerprints to enhance security, and a customizable
    payment gateway hosted payment form and/or receipt page.                                                                                                                   
|
| |  | The Company has certified approximately 85 shopping cart
    solutions providers that have integrated their e-commerce
    shopping carts with the payment gateway. Certified shopping
    carts are Internet companies that provide merchants with easy to
    implement checkout page solutions or software that are already
    integrated to the payment processing gateway.                                                                                                                                                                                                                                                            
|
| |  | In most cases, for CP merchants, technical integration is
    handled by the merchants POS system provider (hardware or
    software). CP merchants interested in integrating directly to
    the payment gateway can use a Card Present API.                                                                                                                                                                                                                                                                                                                                                                                              



| |                    
| | -------------------
| | Additional Services

eCheck.Net®


Fraud Detection Suite tm




| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Amount Filter allows merchants to set upper and lower
    transaction amount limits                                                                                     
|
| |  | Velocity Filter allows merchants to limit the total volume of
    transactions received per hour, preventing high-volume attacks
    common with fraudulent transactions
|
| |  | Shipping-Billing Mismatch Filter identifies high-risk
    potentially fraudulent transactions containing an address
    mismatch                                        
|
| |  | Transaction IP Velocity Filter identifies excessive transactions
    received from the same IP address, isolating suspicious activity
    from a single source          

7



---



##### Table of Contents





| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Suspicious Transaction Filter detects suspicious transactions
    using proprietary identification criteria and transaction
    behavior analysis              
|
| |  | Authorized AIM IP Address feature allows merchants connected via
    the AIM feature to list server IP addresses that are authorized
    to submit transactions
|
| |  | IP Address Blocking feature, allows merchants to block
    transactions from selected IP addresses                                                             

Automated Recurring
Billing tm


Cardholder Authentication tm


FraudScreen.Net®


SalesBoost.Net,




TDS






|                                       |  |                                                                                                                                                                                                                                            
|-------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Solutions Groups                       |  | Functions                                                                                                                                                                                                                                  
|                                      
|Customer Qualification and Acquisition |  | Online, real-time transactionprocessing services and callcenter
    services to help carriersqualify applicants and activate service.                                                                                                      
|                                      
|                                       |  | Transaction processing services include applicant qualification
    and service activation, as well as risk management.                                                                                                                    
|                                      
|                                       |  | Transaction processing interfaces include interfaces that
    support the processing of data at a variety of distribution
    channels, including retail stores, call centers and Internet
    applications, and voice recognition systems.
|                                      
|TeleServices                           |  | TeleServices include qualification and activation, analyst
    reviews, telemarketing to existing and new subscribers, back-up
    and disaster recovery for acquisition and activation services,
    porting support and customer care.   
|                                      
|Authentication Services                |  | Services that provide screening and authentication of identity
    data for users engaged in online transactions.                                                                                                                          

8



---



##### Table of Contents





|                    |  |                                                                                                                                                                                  
|------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Risk Management     |  | A suite of services that make online, real-time inquiries into
    proprietary databases, industry databases and processing modules
    to screen applicants for potential fraud.
|                   
|Consulting Services |  | Solution Development and Deployment Services include
    requirements planning, systems integration, custom software
    development, project management, and training services. 
|                   
|                    |  | Business Advisory Consulting encompasses management consulting
    services designed to leverage best practices in
    telecommunications, online commerce and allied industries.



| |                                       
| | --------------------------------------
| | Customer Qualification and Acquisition

Lightbridge Customer Acquisition
System tm (CAS tm )










| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | InSighttm
    is a database containing information about a carriers
    current accounts, previous accounts, previous applicants and
    preapproved applicants. InSight can decrease a carriers
    costs for evaluating a prospective subscriber by using
    carrier-controlled data points such as subscriber payment
    histories rather than third-party data points, such as credit
    bureau reports, or manual review processes.
|
| |  | Small Business Exchange, a database of credit information
    on small businesses provided under agreement with Equifax
    Information Services LLC, screens businesses for credit risk.                                                                                                                                                                                                                                                    
|
| |  | CAS interfacesdeliver data from the point of sale
    directly to CAS for decisioning. If manual intervention is
    required, data is presented to the appropriate person. Once the
    decision is made, CAS communicates it to the point-of-sale agent.                                                                                                                                                                                   



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Lightbridge®
    POPStm 
    a browser-based point-of-sale application typically used in
    carrier-owned or dealer store locations. POPS runs over the
    Internet or an intranet and features a graphical user interface
    (GUI) that allows even inexperienced sales staff to
    qualify applicants quickly and activate service via a dial-up or
    network connection to CAS.                                                                                                                                       
|
| | Lightbridge® Retail Management
    Systemtm(RMStm) 
    a point-of-sale application that helps telecommunications
    retailers manage the sale of telecommunications products more
    efficiently. RMS handles credit screening, transaction and
    payment processing, service activation, cash drawer management,
    inventory and purchasing management and management reporting.
    The Company no longer actively markets or sells this product and
    does not expect RMS revenues to be significant in the future.

9



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Lightbridge® Speech Interface  a
    point-of-sale application used in carriers agents
    stores or kiosks. Speech Interface converts voice information to
    text to allow even inexperienced sales staff to qualify
    applicants quickly via a connection to CAS.
|
| | Credit Workstation  a character-based
    workstation that allows a carriers credit analyst to enter
    information or to evaluate applications that require manual
    review.                                                                                        
|
| | Browser Interface  allows a carriers
    credit analyst to enter information or to evaluate applications
    that require manual review via a Lightbridge-developed GUI.                                                                                                
|
| | Activation Workstation  allows the user to
    review, correct and reprocess activation requests returned from
    the billing system because of an error.                                                                                                               
|
| | Fulfillment Workstation  allows the user to
    fulfill orders for wireless handsets and accessories at a remote
    or third-party fulfillment center.                                                                                                                  





| |               
| | --------------
| | TeleServicestm

Lightbridge TeleServices






| |                        
| | -----------------------
| | Authentication Services





| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lightbridge®
    IdentityBridgetm:
    A service that allows clients to authenticate the identities of
    users involved in online transactions.
|
| |  | Lightbridge®
    FraudBridgetm:A service that allows clients to screen users involved in
    online transactions for potential fraud.            





| |                
| | ---------------
| | Risk Management





| |   |                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | AirWaves OneScore: A risk management score provided under
    agreement with RiskWise, L.L.C. that is designed to identify the
    most profitable customers, even among consumers whose financial
    history is non-existent or too thin for traditional
    risk assessment tools.

10



---



##### Table of Contents





| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Fraud Sentinel®: A suite of subscription fraud
    management tools, offered separately or in combination. Fraud
    Sentinel includes the following components:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ProFile®, presently a proprietary, inter-carrier database
    of fraud and bad debt information, identifies customers whose
    previous accounts were written off or shut off by a
    participating carrier and provides ongoing screening of existing
    customers. The Company plans to expand the content of ProFile to
    include information from other industries and to market and
    offer database services to clients other than carriers.
|
| | Fraud Detect, a multifaceted fraud detection tool provided under
    agreement with Trans Union L.L.C., analyzes data such as an
    applicants Social Security number, date of birth, address,
    telephone number and drivers license information and
    identifies any discrepancies.                                                                                                                                                             
|
| | Fraud Detect Model, a fraud scoring tool developed jointly by
    Lightbridge and Trans Union L.L.C., is a neural-net scoring
    model that quantifies the probability that a subscriber will be
    written off.                                                                                                                                                                                                                                       
|
| | Fraud ID-Tect, a multifaceted verification tool provided under
    agreement with Trans Union L.L.C., verifies subscriber data,
    identifies possible data entry errors, and alerts carriers to
    potential subscription fraud.                                                                                                                                                                                                                      
|
| | TotalID, an identity verification and application
    analysis service, provided under agreement with Trans Union
    L.L.C., checks for potential fraudulent information in an
    application by comparing application data against multi-source
    databases.                                                                                                                                                                                        
|
| | @Risktm,
    a database of suspect fraud information, identifies subscribers
    whose information matches suspect fraud information gathered
    from previous fraud investigations.                                                                                                                                                                                                                                                                    
|
| | InstantID, a multifaceted verification tool provided under
    agreement with RiskWise, L.L.C., highlights verified information
    and possible data entry errors, and alerts carriers to
    conditions that are often associated with identity theft.                                                                                                                                                                                                 
|
| | FraudPoint, a fraud detection tool provided under agreement with
    RiskWise, L.L.C., validates data provided by subscribers to help
    prevent subscription fraud and identify data entry errors.                                                                                                                                                                                                                                                     
|
| | FraudDefender, a fraud scoring tool provided under agreement
    with RiskWise, L.L.C., rank-orders fraud risk based on a score
    and helps manage review rates.                                                                                                                                                                                                                                                                                       
|
| | Business FraudDefender, a fraud scoring tool provided under
    agreement with RiskWise, L.L.C, rank-orders fraud risk based on
    a score and helps manage review of business applications.                                                                                                                                                                                                                                                            
|
| | Chargeback Defender, a fraud screening tool provided under
    agreement with RiskWise, L.L.C., verifies information of
    applicants to minimize chargebacks to online retailers.                                                                                                                                                                                                                                                                      





| |                    
| | -------------------
| | Consulting Services

Lightbridge Consulting Services (LCS)


11



---



##### Table of Contents







| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Solution Development and Deployment Servicesincludes
    systems installation, integration, custom software development,
    project management and training services.
|
| |  | Business Advisory Consultingincludes management
    consulting services in customer acquisition, distribution and
    retention, and risk management.                 



INS


Lightbridge PrePay tm


PhonePrint






| |                     
| | --------------------
| | Instant Conferencing

Lightbridge Instant Conferencing, tm ,






12



---



##### Table of Contents



Clients




|                             |       |                      |    |    |      |  |    |      |   |  |    |    |  
|---------------------------- | ----- | -------------------- | -- | -- | ---- |  | -- | ---- | - |  | -- | -- | -
|                             |       | Years Ended Dec. 31, |   
|                             |       |                      |   
|                             |       | 2004                 |    |    | 2003 |  |    | 2002 |  
|                             |       |                      |    |    |      |  |    |      |  
|Sprint Spectrum L.P.         |       |                      | 21 | %  |      |  | 28 | %    |   |  | 30 | % 
|AT&T Wireless Services, Inc. |       |                      | 16 |    |      |  | 21 |      |   |  | 21 |   
|Ericsson AB                  |       |                      | *  |    |      |  | 14 |      |   |  | 15 |   
|Nextel Finance Company       |       |                      | 11 |    |      |  | 12 |      |   |  | 11 |   
|                             |       |                      |    |    |      |  |    |      |  
|                             | Total |                      |    | 48 | %    |  |    | 75   | % |  |    | 77 | %
|                             |       |                      |    |    |      |  |    |      |  






|  |                                         
|- | ----------------------------------------
|* | Less than 10% of total revenues for 2004

Payment Processing




TDS










13



---



##### Table of Contents







INS






Instant Conferencing


tm


Sales and Marketing


Payment Processing




14



---



##### Table of Contents





TDS










INS










15



---



##### Table of Contents



Instant Conferencing




Engineering, Research and Development




Competition








Government Regulation




16



---



##### Table of Contents

















17



---



##### Table of Contents





Proprietary Rights














18



---



##### Table of Contents





Employees






Additional Available Information


www.lightbridge.com. www.sec.gov.







|        |           
|------- | ----------
|Item 2. | Properties







19



---



##### Table of Contents










|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Net MoneyIN,
Inc. v. VeriSign, Inc., et al







|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders






PART II







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities



|               |  |      |       |  |     |   |      | 
|-------------- |  | ---- | ----- |  | --- | - | ---- | 
|               |  | High |       |  | Low |  
|               |  |      |       |  |     |  
|2004           |  |      |       |  |     |   |      | 
|First Quarter  |  | $    | 9.06  |  |     | $ | 5.90 | 
|Second Quarter |  | $    | 6.62  |  |     | $ | 5.16 | 
|Third Quarter  |  | $    | 5.54  |  |     | $ | 3.74 | 
|Fourth Quarter |  | $    | 6.04  |  |     | $ | 4.44 | 
|2003           |  |      |       |  |     |   |      | 
|First Quarter  |  | $    | 6.82  |  |     | $ | 5.88 | 
|Second Quarter |  | $    | 9.10  |  |     | $ | 6.40 | 
|Third Quarter  |  | $    | 10.79 |  |     | $ | 8.61 | 
|Fourth Quarter |  | $    | 10.70 |  |     | $ | 8.21 | 







20



---



##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data





|                                                   |  |                                          |         |   |      |   |         |      |  |   |         |   |  |      |         |  |  |   |         | 
|-------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- |  |  | - | ------- | 
|                                                   |  | Years Ended Dec. 31,                     |        
|                                                   |  |                                          |        
|                                                   |  | 2004                                     |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|                                                   |  |                                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|                                                   |  | (In thousands, except per share amounts) |        
|Statement of Operations Data:                      |  |                                          |         |   |      |   |         |      |  |   |         |   |  |      |         |  |  |   |         | 
|Revenues                                           |  | $                                        | 133,055 |   |      | $ | 119,978 |      |  | $ | 133,438 |   |  | $    | 176,616 |  |  | $ | 186,644 | 
|Cost of revenues                                   |  |                                          | 67,890  |   |      |   | 61,949  |      |  |   | 65,943  |   |  |      | 80,811  |  |  |   | 81,732  | 
|                                                   |  |                                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Gross profit                                       |  |                                          | 65,165  |   |      |   | 58,029  |      |  |   | 67,495  |   |  |      | 95,805  |  |  |   | 104,912 | 
|                                                   |  |                                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Operating expenses:                                |  |                                          |         |   |      |   |         |      |  |   |         |   |  |      |         |  |  |   |         | 
|Engineering and development costs                  |  |                                          | 29,000  |   |      |   | 28,426  |      |  |   | 29,269  |   |  |      | 32,259  |  |  |   | 29,256  | 
|Sales and marketing                                |  |                                          | 22,541  |   |      |   | 14,239  |      |  |   | 13,270  |   |  |      | 20,460  |  |  |   | 22,159  | 
|General and administrative                         |  |                                          | 15,987  |   |      |   | 14,143  |      |  |   | 18,170  |   |  |      | 19,517  |  |  |   | 17,955  | 
|Restructuring costs                                |  |                                          | 4,346   |   |      |   | 5,079   |      |  |   | 3,616   |   |  |      | 4,000   |  |  |   |        | 
|Impairment of goodwill and other intangible assets |  |                                          | 2,263   |   |      |   |        |      |  |   |        |   |  |      |        |  |  |   |        | 
|Purchased in-process research and development      |  |                                          | 679     |   |      |   |        |      |  |   | 1,618   |   |  |      |        |  |  |   |        | 
|Gain on sale of Fraud Centurion assets             |  |                                          | (2,673  | ) |      |   |        |      |  |   |        |   |  |      |        |  |  |   |        | 
|Amortization of goodwill and acquired workforce    |  |                                          |        |   |      |   |        |      |  |   |        |   |  |      |        |  |  |   | 502     | 
|Merger related costs                               |  |                                          |        |   |      |   |        |      |  |   |        |   |  |      | 5,999   |  |  |   |        | 
|                                                   |  |                                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Total operating expenses                           |  |                                          | 72,143  |   |      |   | 61,887  |      |  |   | 65,943  |   |  |      | 82,235  |  |  |   | 69,872  | 
|                                                   |  |                                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Income (loss) from operations                      |  |                                          | (6,978  | ) |      |   | (3,858  | )    |  |   | 1,552   |   |  |      | 13,570  |  |  |   | 35,040  | 
|Interest income                                    |  |                                          | 1,185   |   |      |   | 1,778   |      |  |   | 2,439   |   |  |      | 4,233   |  |  |   | 5,446   | 
|Equity in loss of partnership investment           |  |                                          |        |   |      |   | (471    | )    |  |   | (464    | ) |  |      |        |  |  |   |        | 
|                                                   |  |                                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Income (loss) before income taxes                  |  |                                          | (5,793  | ) |      |   | (2,551  | )    |  |   | 3,527   |   |  |      | 17,803  |  |  |   | 40,486  | 
|Provision for (benefit from) income taxes          |  |                                          | 8,351   |   |      |   | (1,102  | )    |  |   | (103    | ) |  |      | 3,848   |  |  |   | 9,974   | 
|                                                   |  |                                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Net income (loss)                                  |  | $                                        | (14,144 | ) |      | $ | (1,449  | )    |  | $ | 3,630   |   |  | $    | 13,955  |  |  | $ | 30,512  | 
|                                                   |  |                                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Basic earnings (loss) per share                    |  | $                                        | (0.53   | ) |      | $ | (0.05   | )    |  | $ | 0.13    |   |  | $    | 0.50    |  |  | $ | 1.12    | 
|                                                   |  |                                          |         |   |      |   |         |      |  |   |         |   |  |      |        
|Diluted earnings (loss) per share                  |  | $                                        | (0.53   | ) |      | $ | (0.05   | )    |  | $ | 0.13    |   |  | $    | 0.48    |  |  | $ | 1.04    | 
|                                                   |  |                                          |         |   |      |   |         |      |  |   |         |   |  |      |        

21



---



##### Table of Contents



|                                                  |  |                |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|------------------------------------------------- |  | -------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- |  |  | - | ------- | 
|                                                  |  | December 31,   |        
|                                                  |  |                |        
|                                                  |  | 2004           |         |  | 2003 |   |         | 2002 |  |   | 2001    |  |  | 2000 |        
|                                                  |  |                |         |  |      |   |         |      |  |   |         |  |  |      |        
|                                                  |  | (In thousands) |        
|Balance Sheet Data:                               |  |                |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|Cash, cash equivalents and short-term investments |  | $              | 52,225  |  |      | $ | 133,488 |      |  | $ | 133,470 |  |  | $    | 118,570 |  |  | $ | 98,743  | 
|Working capital                                   |  | $              | 43,597  |  |      | $ | 137,684 |      |  | $ | 136,501 |  |  | $    | 127,129 |  |  | $ | 109,672 | 
|Total assets                                      |  | $              | 170,486 |  |      | $ | 177,836 |      |  | $ | 180,672 |  |  | $    | 188,882 |  |  | $ | 187,680 | 
|Long-term obligations, less current portion       |  | $              | 2,858   |  |      | $ | 33      |      |  | $ | 259     |  |  | $    | 667     |  |  | $ | 963     | 
|Stockholders equity                              |  | $              | 136,928 |  |      | $ | 154,503 |      |  | $ | 159,641 |  |  | $    | 161,522 |  |  | $ | 144,986 | 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

Critical Accounting Policies and Estimates






Revenue Recognition.


Allowance for Doubtful Accounts.


Income Taxes and Deferred Taxes.


Restructuring Estimates.


22



---



##### Table of Contents



Goodwill and Acquired Intangible Assets.


Overview














23



---



##### Table of Contents



















24



---



##### Table of Contents





Operating Segments




tm tm






25



---



##### Table of Contents



Customer Concentration




|         |       |                      |    |    |      |  |    |      |   |  |    |    |  
|-------- | ----- | -------------------- | -- | -- | ---- |  | -- | ---- | - |  | -- | -- | -
|         |       | Years Ended Dec. 31, |   
|         |       |                      |   
|         |       | 2004                 |    |    | 2003 |  |    | 2002 |  
|         |       |                      |    |    |      |  |    |      |  
|Sprint   |       |                      | 21 | %  |      |  | 28 | %    |   |  | 30 | % 
|AT&T     |       |                      | 16 |    |      |  | 21 |      |   |  | 21 |   
|Ericsson |       |                      | *  |    |      |  | 14 |      |   |  | 15 |   
|Nextel   |       |                      | 11 |    |      |  | 12 |      |   |  | 11 |   
|         |       |                      |    |    |      |  |    |      |  
|         | Total |                      |    | 48 | %    |  |    | 75   | % |  |    | 77 | %
|         |       |                      |    |    |      |  |    |      |  






|  |                                                      
|- | -----------------------------------------------------
|* |  Represents less than 10% of total revenues in 2004.



26



---



##### Table of Contents



Results of Operations




| |                                                                            
| | ---------------------------------------------------------------------------
| | Year Ended December 31, 2004 Compared with Year Ended
    December 31, 2003

Revenues.


|                                    |  |                        |         |  |              |   |         |            |  |   |            |   |  |  |       |  
|----------------------------------- |  | ---------------------- | ------- |  | ------------ | - | ------- | ---------- |  | - | ---------- | - |  |  | ----- | -
|                                    |  | Year Ended             |         |  | Year Ended   |   |         |            |  |  
|                                    |  | December 31,           |         |  | December 31, |   |         | $          |  |   | %          |  
|                                    |  | 2004                   |         |  | 2003         |   |         | Difference |  |   | Difference |  
|                                    |  |                        |         |  |              |   |         |            |  |   |            |  
|                                    |  | (Dollars in thousands) |        
|Transaction services                |  | $                      | 103,648 |  |              | $ | 80,552  |            |  | $ | 23,096     |   |  |  | 28.7  | %
|Consulting and maintenance services |  |                        | 19,898  |  |              |   | 28,666  |            |  |   | (8,768     | ) |  |  | (30.6 | )
|Software licensing and hardware     |  |                        | 9,509   |  |              |   | 10,760  |            |  |   | (1,251     | ) |  |  | (11.6 | )
|                                    |  |                        |         |  |              |   |         |            |  |   |            |  
|Total                               |  | $                      | 133,055 |  |              | $ | 119,978 |            |  | $ | 13,077     |   |  |  | 10.9  | %
|                                    |  |                        |         |  |              |   |         |            |  |   |            |  









27



---



##### Table of Contents









Cost of Revenues and Gross Profit.


28



---



##### Table of Contents





|                                      |  |                        |        |   |              |   |        |            |  |   |            |   |  |  |       |   
|------------------------------------- |  | ---------------------- | ------ | - | ------------ | - | ------ | ---------- |  | - | ---------- | - |  |  | ----- | --
|                                      |  | Year Ended             |        |   | Year Ended   |   |        |            |  |  
|                                      |  | December 31,           |        |   | December 31, |   |        | $          |  |   | %          |  
|                                      |  | 2004                   |        |   | 2003         |   |        | Difference |  |   | Difference |  
|                                      |  |                        |        |   |              |   |        |            |  |   |            |  
|                                      |  | (Dollars in thousands) |       
|Cost of revenues:                     |  |                        |        |   |              |   |        |            |  |   |            |   |  |  |       |   
|Transaction services                  |  | $                      | 54,831 |   |              | $ | 45,667 |            |  | $ | 9,164      |   |  |  | 20.1  | % 
|Consulting and maintenance services   |  |                        | 9,930  |   |              |   | 12,741 |            |  |   | (2,811     | ) |  |  | (22.1 | ) 
|Software licensing and hardware       |  |                        | 3,129  |   |              |   | 3,541  |            |  |   | (412       | ) |  |  | (11.6 | ) 
|                                      |  |                        |        |   |              |   |        |            |  |   |            |  
|Total cost of revenues                |  | $                      | 67,890 |   |              | $ | 61,949 |            |  | $ | 5,941      |   |  |  | 9.6   | % 
|                                      |  |                        |        |   |              |   |        |            |  |   |            |  
|Gross profit:                         |  |                        |        |   |              |   |        |            |  |   |            |   |  |  |       |   
|Transaction services $                |  | $                      | 48,817 |   |              | $ | 34,885 |            |  | $ | 13,932     |   |  |  | 39.9  | % 
|Transaction services %                |  |                        | 47.1   | % |              |   | 43.3   | %          |  |   |            |   |  |  |       |   
|Consulting and maintenance services $ |  | $                      | 9,968  |   |              | $ | 15,925 |            |  | $ | (5,957     | ) |  |  | (37.4 | )%
|Consulting and maintenance services % |  |                        | 50.1   | % |              |   | 55.6   | %          |  |   |            |   |  |  |       |   
|Software licensing and hardware $     |  | $                      | 6,380  |   |              | $ | 7,219  |            |  | $ | (839       | ) |  |  | (11.6 | )%
|Software licensing and hardware %     |  |                        | 67.1   | % |              |   | 67.1   | %          |  |   |            |   |  |  |       |   
|                                      |  |                        |        |   |              |   |        |            |  |   |            |  
|Total gross profit $                  |  | $                      | 65,165 |   |              | $ | 58,029 |            |  | $ | 7,136      |   |  |  | 12.3  | % 
|                                      |  |                        |        |   |              |   |        |            |  |   |            |  
|Total gross profit %                  |  |                        | 49.0   | % |              |   | 48.4   | %          |  |   |            |   |  |  |       |   







29



---



##### Table of Contents







Operating Expenses.


|                                              |  |                        |        |   |              |   |        |            |  |   |            |   |  |  |       |  
|--------------------------------------------- |  | ---------------------- | ------ | - | ------------ | - | ------ | ---------- |  | - | ---------- | - |  |  | ----- | -
|                                              |  | Year Ended             |        |   | Year Ended   |   |        |            |  |  
|                                              |  | December 31,           |        |   | December 31, |   |        | $          |  |   | %          |  
|                                              |  | 2004                   |        |   | 2003         |   |        | Difference |  |   | Difference |  
|                                              |  |                        |        |   |              |   |        |            |  |   |            |  
|                                              |  | (Dollars in thousands) |       
|Engineering and development                   |  | $                      | 29,000 |   |              | $ | 28,426 |            |  | $ | 574        |   |  |  | 2.0   | %
|Sales and marketing                           |  |                        | 22,541 |   |              |   | 14,239 |            |  |   | 8,302      |   |  |  | 58.3  |  
|General and administrative                    |  |                        | 15,987 |   |              |   | 14,143 |            |  |   | 1,844      |   |  |  | 13.0  |  
|Restructuring                                 |  |                        | 4,346  |   |              |   | 5,079  |            |  |   | (733       | ) |  |  | (14.4 | )
|Impairment of goodwill                        |  |                        | 1,664  |   |              |   |       |            |  |   | 1,664      |   |  |  |      |  
|Impairment of other intangible assets         |  |                        | 599    |   |              |   |       |            |  |   | 599        |   |  |  |      |  
|Purchased in-process research and development |  |                        | 679    |   |              |   |       |            |  |   | 679        |   |  |  |      |  
|Gain on sale of Fraud Centurion assets        |  |                        | (2,673 | ) |              |   |       |            |  |   | (2,673     | ) |  |  |      |  
|                                              |  |                        |        |   |              |   |        |            |  |   |            |  
|Total                                         |  | $                      | 72,143 |   |              | $ | 61,887 |            |  | $ | 10,256     |   |  |  | 16.6  | %
|                                              |  |                        |        |   |              |   |        |            |  |   |            |  

Engineering and Development.




Sales and Marketing.




30



---



##### Table of Contents



General and Administrative.




Restructuring.


Impairment of Intangible Assets.


Purchased In-Process Research and Development
(IPR&D).






31



---



##### Table of Contents





Gain on Sale of Fraud Centurion Assets.


Interest Income.


Equity in Loss of Partnership Investment.


Provision for (Benefit from) Income Taxes.






32



---



##### Table of Contents



Results by Operating Segment.


|                               |  |                        |         |    |              |   |         |            |  |   |            |   |  |  |       |   
|------------------------------ |  | ---------------------- | ------- | -- | ------------ | - | ------- | ---------- |  | - | ---------- | - |  |  | ----- | --
|                               |  | Year Ended             |         |    | Year Ended   |   |         |            |  |  
|                               |  | December 31,           |         |    | December 31, |   |         | $          |  |   | %          |  
|                               |  | 2004                   |         |    | 2003         |   |         | Difference |  |   | Difference |  
|                               |  |                        |         |    |              |   |         |            |  |   |            |  
|                               |  | (Dollars in thousands) |        
|Revenues:                      |  |                        |         |    |              |   |         |            |  |   |            |   |  |  |       |   
|TDS                            |  | $                      | 88,297  |    |              | $ | 99,023  |            |  | $ | (10,726    | ) |  |  | (10.8 | )%
|Payment Processing             |  |                        | 26,836  |    |              |   |        |            |  |   | 26,836     |   |  |  |      |   
|INS                            |  |                        | 17,540  |    |              |   | 20,955  |            |  |   | (3,415     | ) |  |  | (16.3 | ) 
|Instant Conferencing           |  |                        | 382     |    |              |   |        |            |  |   | 382        |   |  |  |      |   
|                               |  |                        |         |    |              |   |         |            |  |   |            |  
|Total                          |  | $                      | 133,055 |    |              | $ | 119,978 |            |  | $ | 13,077     |   |  |  | 10.9  | % 
|                               |  |                        |         |    |              |   |         |            |  |   |            |  
|Gross Profit (Loss):           |  |                        |         |    |              |   |         |            |  |   |            |   |  |  |       |   
|TDS $                          |  | $                      | 37,020  |    |              | $ | 46,399  |            |  | $ | (9,379     | ) |  |  | (20.2 | )%
|TDS %                          |  |                        | 41.9    | %  |              |   | 46.9    | %          |  |   |            |   |  |  |       |   
|Payment Processing $           |  | $                      | 19,580  |    |              | $ |        |            |  | $ | 19,580     |   |  |  |      | % 
|Payment Processing %           |  |                        | 73.0    | %  |              |   |        | %          |  |   |            |   |  |  |       |   
|INS $                          |  | $                      | 8,790   |    |              | $ | 11,630  |            |  | $ | (2,840     | ) |  |  | (24.4 | )%
|INS %                          |  |                        | 50.1    | %  |              |   | 55.5    | %          |  |   |            |   |  |  |       |   
|Instant Conferencing $         |  | $                      | (225    | )  |              | $ |        |            |  | $ | (225       | ) |  |  |      | % 
|Instant Conferencing %         |  |                        | (58.9   | )% |              |   |        | %          |  |   |            |   |  |  |       |   
|                               |  |                        |         |    |              |   |         |            |  |   |            |  
|Total gross profit $           |  | $                      | 65,165  |    |              | $ | 58,029  |            |  | $ | 7,136      |   |  |  | 12.3  | % 
|                               |  |                        |         |    |              |   |         |            |  |   |            |  
|Total gross profit %           |  |                        | 49.0    | %  |              |   | 48.4    | %          |  |   |            |   |  |  |       |   
|                               |  |                        |         |    |              |   |         |            |  |   |            |  
|Operating Income (Loss):       |  |                        |         |    |              |   |         |            |  |   |            |   |  |  |       |   
|TDS                            |  | $                      | 16,188  |    |              | $ | 22,025  |            |  | $ | (5,837     | ) |  |  | (26.5 | )%
|Payment Processing             |  |                        | 3,560   |    |              |   |        |            |  |   | 3,560      |   |  |  |      |   
|INS                            |  |                        | (4,014  | )  |              |   | (2,541  | )          |  |   | (1,473     | ) |  |  | (58.0 | ) 
|Instant Conferencing           |  |                        | (4,309  | )  |              |   | (3,536  | )          |  |   | (773       | ) |  |  | (21.9 | ) 
|                               |  |                        |         |    |              |   |         |            |  |   |            |  
|Total segment operating income |  | $                      | 11,425  |    |              | $ | 15,948  |            |  | $ | (4,523     | ) |  |  | (28.4 | )%
|                               |  |                        |         |    |              |   |         |            |  |   |            |  
|Reconciling items(1)           |  |                        | (18,403 | )  |              |   | (19,806 | )          |  |   |            |   |  |  |       |   
|Total operating loss           |  | $                      | (6,978  | )  |              | $ | (3,858  | )          |  |   |            |   |  |  |       |   
|                               |  |                        |         |    |              |   |         |            |  |   |            |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  Reconciling items consist of certain corporate or
    centralized marketing and general and administrative expenses
    not allocated to our business unit segments, because these
    activities are managed separately from the business units. Also,
    we do not allocate restructuring expenses and other
    non-recurring gains or charges to our business unit segments
    because our Chief Executive Officer evaluates the segment
    results exclusive of these items.



| |                              
| | -----------------------------
| | Revenues by Operating Segment

TDS.


33



---



##### Table of Contents



Payment Processing.


INS.


Instant Conferencing.




| |                                         
| | ----------------------------------------
| | Gross Profit (Loss) by Operating Segment

TDS.


Payment Processing.


INS.


Instant Conferencing.




| |                                              
| | ---------------------------------------------
| | Operating Income (Loss) by Operating Segment.

TDS.


Payment Processing.


INS.


Instant Conferencing.


34



---



##### Table of Contents





| |                                                                            
| | ---------------------------------------------------------------------------
| | Year Ended December 31, 2003 Compared with Year Ended
    December 31, 2002

Revenues.


|                                    |  |                        |         |  |              |   |         |            |  |   |            |   |  |  |       |   
|----------------------------------- |  | ---------------------- | ------- |  | ------------ | - | ------- | ---------- |  | - | ---------- | - |  |  | ----- | --
|                                    |  | Year Ended             |         |  | Year Ended   |   |         |            |  |  
|                                    |  | December 31,           |         |  | December 31, |   |         | $          |  |   | %          |  
|                                    |  | 2003                   |         |  | 2002         |   |         | Difference |  |   | Difference |  
|                                    |  |                        |         |  |              |   |         |            |  |   |            |  
|                                    |  | (Dollars in thousands) |        
|Transaction services                |  | $                      | 80,552  |  |              | $ | 88,376  |            |  | $ | (7,824     | ) |  |  | (8.9  | )%
|Consulting and maintenance services |  |                        | 28,666  |  |              |   | 32,491  |            |  |   | (3,825     | ) |  |  | (11.8 | ) 
|Software licensing and hardware     |  |                        | 10,760  |  |              |   | 12,571  |            |  |   | (1,811     | ) |  |  | (14.4 | ) 
|                                    |  |                        |         |  |              |   |         |            |  |   |            |  
|Total                               |  | $                      | 119,978 |  |              | $ | 133,438 |            |  | $ | (13,460    | ) |  |  | (10.1 | )%
|                                    |  |                        |         |  |              |   |         |            |  |   |            |  







Cost of Revenues and Gross Profit.


|                                      |  |                        |        |   |              |   |        |            |  |   |            |   |  |  |       |   
|------------------------------------- |  | ---------------------- | ------ | - | ------------ | - | ------ | ---------- |  | - | ---------- | - |  |  | ----- | --
|                                      |  | Year Ended             |        |   | Year Ended   |   |        |            |  |  
|                                      |  | December 31,           |        |   | December 31, |   |        | $          |  |   | %          |  
|                                      |  | 2003                   |        |   | 2002         |   |        | Difference |  |   | Difference |  
|                                      |  |                        |        |   |              |   |        |            |  |   |            |  
|                                      |  | (Dollars in thousands) |       
|Cost of revenues:                     |  |                        |        |   |              |   |        |            |  |   |            |   |  |  |       |   
|Transaction services                  |  | $                      | 45,667 |   |              | $ | 49,194 |            |  | $ | (3,527     | ) |  |  | (7.2  | )%
|Consulting and maintenance services   |  |                        | 12,741 |   |              |   | 13,663 |            |  |   | (922       | ) |  |  | (6.7  | ) 
|Software licensing and hardware       |  |                        | 3,541  |   |              |   | 3,086  |            |  |   | 455        |   |  |  | 14.7  |   
|                                      |  |                        |        |   |              |   |        |            |  |   |            |  
|Total cost of revenues                |  | $                      | 61,949 |   |              | $ | 65,943 |            |  | $ | (3,994     | ) |  |  | (6.1  | )%
|                                      |  |                        |        |   |              |   |        |            |  |   |            |  
|Gross profit:                         |  |                        |        |   |              |   |        |            |  |   |            |   |  |  |       |   
|Transaction services $                |  | $                      | 34,885 |   |              | $ | 39,182 |            |  | $ | (4,297     | ) |  |  | (11.0 | )%
|Transaction services %                |  |                        | 43.3   | % |              |   | 44.3   | %          |  |   |            |   |  |  |       |   
|Consulting and maintenance services $ |  | $                      | 15,925 |   |              | $ | 18,828 |            |  | $ | (2,903     | ) |  |  | (15.4 | )%
|Consulting and maintenance services % |  |                        | 55.6   | % |              |   | 57.9   | %          |  |   |            |   |  |  |       |   
|Software licensing and hardware $     |  | $                      | 7,219  |   |              | $ | 9,485  |            |  | $ | (2,266     | ) |  |  | (23.9 | )%
|Software licensing and hardware %     |  |                        | 67.1   | % |              |   | 75.5   | %          |  |   |            |   |  |  |       |   
|                                      |  |                        |        |   |              |   |        |            |  |   |            |  
|Total gross profit $                  |  | $                      | 58,029 |   |              | $ | 67,495 |            |  | $ | (9,466     | ) |  |  | (14.0 | )%
|                                      |  |                        |        |   |              |   |        |            |  |   |            |  
|Total gross profit %                  |  |                        | 48.4   | % |              |   | 50.6   | %          |  |   |            |   |  |  |       |   

35



---



##### Table of Contents









Operating Expenses.


|                                              |  |                        |        |  |              |   |        |            |  |   |            |   |  |  |        |   
|--------------------------------------------- |  | ---------------------- | ------ |  | ------------ | - | ------ | ---------- |  | - | ---------- | - |  |  | ------ | --
|                                              |  | Year Ended             |        |  | Year Ended   |   |        |            |  |  
|                                              |  | December 31,           |        |  | December 31, |   |        | $          |  |   | %          |  
|                                              |  | 2003                   |        |  | 2002         |   |        | Difference |  |   | Difference |  
|                                              |  |                        |        |  |              |   |        |            |  |   |            |  
|                                              |  | (Dollars in thousands) |       
|Engineering and development                   |  | $                      | 28,426 |  |              | $ | 29,269 |            |  | $ | (843       | ) |  |  | (2.9   | )%
|Sales and marketing                           |  |                        | 14,239 |  |              |   | 13,270 |            |  |   | 969        |   |  |  | 7.3    |   
|General and administrative                    |  |                        | 14,143 |  |              |   | 18,170 |            |  |   | (4,027     | ) |  |  | (22.2  | ) 
|Restructuring                                 |  |                        | 5,079  |  |              |   | 3,616  |            |  |   | 1,463      |   |  |  | 40.5   |   
|Purchased in-process research and development |  |                        |       |  |              |   | 1,618  |            |  |   | (1,618     | ) |  |  | (100.0 | ) 
|                                              |  |                        |        |  |              |   |        |            |  |   |            |  
|Total                                         |  | $                      | 61,887 |  |              | $ | 65,943 |            |  | $ | (4,056     | ) |  |  | (6.2   | )%
|                                              |  |                        |        |  |              |   |        |            |  |   |            |  

Engineering and Development.


Sales and Marketing.


General and Administrative.


Restructuring.


In-Process Research and Development
(IPR&D).


36



---



##### Table of Contents





Interest Income.


Equity in Loss of Partnership Investment.


Provision for (Benefit from) Income Taxes.


37



---



##### Table of Contents



Results by Operating Segment.


|                               |  |                        |         |   |              |   |         |            |  |   |            |   |  |  |        |   
|------------------------------ |  | ---------------------- | ------- | - | ------------ | - | ------- | ---------- |  | - | ---------- | - |  |  | ------ | --
|                               |  | Year Ended             |         |   | Year Ended   |   |         |            |  |  
|                               |  | December 31,           |         |   | December 31, |   |         | $          |  |   | %          |  
|                               |  | 2003                   |         |   | 2002         |   |         | Difference |  |   | Difference |  
|                               |  |                        |         |   |              |   |         |            |  |   |            |  
|                               |  | (Dollars in thousands) |        
|Revenues:                      |  |                        |         |   |              |   |         |            |  |   |            |   |  |  |        |   
|TDS                            |  | $                      | 99,023  |   |              | $ | 107,121 |            |  | $ | (8,098     | ) |  |  | (7.6   | )%
|INS                            |  |                        | 20,955  |   |              |   | 26,045  |            |  |   | (5,090     | ) |  |  | (19.5  | ) 
|Instant Conferencing           |  |                        |        |   |              |   | 272     |            |  |   | (272       | ) |  |  | (100.0 | ) 
|                               |  |                        |         |   |              |   |         |            |  |   |            |  
|Total                          |  | $                      | 119,978 |   |              | $ | 133,438 |            |  | $ | (13,460    | ) |  |  | (10.1  | )%
|                               |  |                        |         |   |              |   |         |            |  |   |            |  
|Gross Profit (Loss):           |  |                        |         |   |              |   |         |            |  |   |            |   |  |  |        |   
|TDS $                          |  | $                      | 46,399  |   |              | $ | 51,251  |            |  | $ | (4,852     | ) |  |  | (9.5   | )%
|TDS %                          |  |                        | 46.9    | % |              |   | 47.8    | %          |  |   |            |   |  |  |        |   
|INS $                          |  | $                      | 11,630  |   |              | $ | 15,972  |            |  | $ | (4,342     | ) |  |  | (27.2  | )%
|INS %                          |  |                        | 55.5    | % |              |   | 61.3    | %          |  |   |            |   |  |  |        |   
|Instant Conferencing $         |  | $                      |        |   |              | $ | 272     |            |  | $ | (272       | ) |  |  | (100.0 | )%
|Instant Conferencing %         |  |                        |        | % |              |   | 100.0   | %          |  |   |            |   |  |  |        |   
|                               |  |                        |         |   |              |   |         |            |  |   |            |  
|Total gross profit $           |  | $                      | 58,029  |   |              | $ | 67,495  |            |  | $ | (9,466     | ) |  |  | (14.0  | )%
|                               |  |                        |         |   |              |   |         |            |  |   |            |  
|Total gross profit %           |  |                        | 48.4    | % |              |   | 50.6    | %          |  |   |            |   |  |  |        |   
|                               |  |                        |         |   |              |   |         |            |  |   |            |  
|Operating Income (Loss):       |  |                        |         |   |              |   |         |            |  |   |            |   |  |  |        |   
|TDS                            |  | $                      | 22,025  |   |              | $ | 25,749  |            |  | $ | (3,724     | ) |  |  | (14.5  | )%
|INS                            |  |                        | (2,541  | ) |              |   | (1,986  | )          |  |   | (555       | ) |  |  | (27.9  | ) 
|Instant Conferencing           |  |                        | (3,536  | ) |              |   | (4,711  | )          |  |   | 1,175      |   |  |  | 24.9   |   
|                               |  |                        |         |   |              |   |         |            |  |   |            |  
|Total segment operating income |  | $                      | 15,948  |   |              | $ | 19,052  |            |  | $ | (4,056     | ) |  |  | (6.2   | )%
|                               |  |                        |         |   |              |   |         |            |  |   |            |  
|Reconciling items(1)           |  |                        | (19,806 | ) |              |   | (17,500 | )          |  |   |            |   |  |  |        |   
|Total operating income (loss)  |  | $                      | (3,858  | ) |              | $ | 1,552   |            |  |   |            |   |  |  |        |   
|                               |  |                        |         |   |              |   |         |            |  |   |            |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  Reconciling items consist of certain corporate or
    centralized marketing and general and administrative expenses
    not allocated to our business unit segments, because these
    activities are managed separately from the business units. Also,
    we do not allocate restructuring expenses and other
    non-recurring gains or charges to our business unit segments
    because our Chief Executive Officer evaluates the segment
    results exclusive of these items.



| |                              
| | -----------------------------
| | Revenues by Operating Segment

TDS.


INS.


38



---



##### Table of Contents



Instant Conferencing.




| |                                         
| | ----------------------------------------
| | Gross Profit (Loss) by Operating Segment

TDS.


INS.


Instant Conferencing.




| |                                             
| | --------------------------------------------
| | Operating Income (Loss) by Operating Segment

TDS.


INS.


Instant Conferencing.


Liquidity and Capital Resources








39



---



##### Table of Contents













|                  |  |                        |        |           |        |   |       |           |  |   |           |  |  |         |       |  |  |   |       | 
|----------------- |  | ---------------------- | ------ | --------- | ------ | - | ----- | --------- |  | - | --------- |  |  | ------- | ----- |  |  | - | ----- | 
|                  |  |                        |        | Less than |        |   |       |           |  |   | More than | 
|                  |  | Total                  |        |           | 1 Year |   |       | 1-3 Years |  |   | 3-5 Years |  |  | 5 Years |      
|                  |  |                        |        |           |        |   |       |           |  |   |           |  |  |         |      
|                  |  | (Dollars in thousands) |       
|Operating leases  |  | $                      | 20,065 |           |        | $ | 4,840 |           |  | $ | 6,833     |  |  | $       | 4,866 |  |  | $ | 3,526 | 
|Letters of credit |  | $                      | 1,600  |           |        | $ | 1,600 |           |  | $ | 1,600     |  |  |         |      |  |  |   |      | 





40



---



##### Table of Contents



Off-Balance Sheet Arrangements




Restructurings






|                                            |  |                |   |         |  |   |          |              |  |      |     |  |  |   |       | 
|------------------------------------------- |  | -------------- | - | ------- |  | - | -------- | ------------ |  | ---- | --- |  |  | - | ----- | 
|                                            |  | Balance at     |   |         |  |   |          | Balance at   | 
|                                            |  | December 31,   |   |         |  |   |          | December 31, | 
|                                            |  | 2003           |   | Accrued |  |   | Utilized |              |  | 2004 |    
|                                            |  |                |   |         |  |   |          |              |  |      |    
|                                            |  | (In thousands) |  
|Employee severance and termination benefits |  | $              |  |         |  | $ | 1,410    |              |  | $    | 46  |  |  | $ | 1,364 | 
|Facility closing and related costs          |  |                |  |         |  |   | 178      |              |  |      | 178 |  |  |   |      | 
|                                            |  |                |   |         |  |   |          |              |  |      |     | 
|Total                                       |  | $              |  |         |  | $ | 1,588    |              |  | $    | 224 |  |  | $ | 1,364 | 
|                                            |  |                |   |         |  |   |          |              |  |      |     | 





|                                            |  |                |   |         |  |   |          |              |  |      |     |  |  |   |    | 
|------------------------------------------- |  | -------------- | - | ------- |  | - | -------- | ------------ |  | ---- | --- |  |  | - | -- | 
|                                            |  | Balance at     |   |         |  |   |          | Balance at   | 
|                                            |  | December 31,   |   |         |  |   |          | December 31, | 
|                                            |  | 2003           |   | Accrued |  |   | Utilized |              |  | 2004 |    
|                                            |  |                |   |         |  |   |          |              |  |      |    
|                                            |  | (In thousands) |  
|Employee severance and termination benefits |  | $              |  |         |  | $ | 172      |              |  | $    | 147 |  |  | $ | 25 | 
|                                            |  |                |   |         |  |   |          |              |  |      |     | 



41



---



##### Table of Contents





|                                            |  |                |   |         |  |   |          |              |  |      |       |  |  |   |     | 
|------------------------------------------- |  | -------------- | - | ------- |  | - | -------- | ------------ |  | ---- | ----- |  |  | - | --- | 
|                                            |  | Balance at     |   |         |  |   |          | Balance at   | 
|                                            |  | December 31,   |   |         |  |   |          | December 31, | 
|                                            |  | 2003           |   | Accrued |  |   | Utilized |              |  | 2004 |      
|                                            |  |                |   |         |  |   |          |              |  |      |      
|                                            |  | (In thousands) |  
|Employee severance and termination benefits |  | $              |  |         |  | $ | 2,090    |              |  | $    | 1,255 |  |  | $ | 835 | 
|                                            |  |                |   |         |  |   |          |              |  |      |       | 





|                                            |  |              |   |                |  |   |          |              |  |      |     |  |  |   |   | 
|------------------------------------------- |  | ------------ | - | -------------- |  | - | -------- | ------------ |  | ---- | --- |  |  | - | - | 
|                                            |  | Balance at   |   |                |  |   |          | Balance at   | 
|                                            |  | December 31, |   |                |  |   |          | December 31, | 
|                                            |  | 2003         |   | Accrued        |  |   | Utilized |              |  | 2004 |    
|                                            |  |              |   |                |  |   |          |              |  |      |    
|                                            |  |              |   | (In thousands) |  |   |         
|Employee severance and termination benefits |  | $            |  |                |  | $ | 488      |              |  | $    | 483 |  |  | $ | 5 | 
|                                            |  |              |   |                |  |   |          |              |  |      |     | 





|                                            |  |                |       |  |         |   |     |          |              |   |      |  |  |   |     | 
|------------------------------------------- |  | -------------- | ----- |  | ------- | - | --- | -------- | ------------ | - | ---- |  |  | - | --- | 
|                                            |  | Balance at     |       |  |         |   |     |          | Balance at   |  
|                                            |  | December 31,   |       |  |         |   |     |          | December 31, |  
|                                            |  | 2003           |       |  | Accrued |   |     | Utilized |              |   | 2004 | 
|                                            |  |                |       |  |         |   |     |          |              |   |      | 
|                                            |  | (In thousands) |      
|Employee severance and termination benefits |  | $              | 253   |  |         | $ | (93 | )        |              | $ | 160  |  |  | $ |    | 
|Facility closing and related costs          |  |                | 1,396 |  |         |   | 137 |          |              |   | 665  |  |  |   | 868 | 
|                                            |  |                |       |  |         |   |     |          |              |   |      | 
|Total                                       |  | $              | 1,649 |  |         | $ | 44  |          |              | $ | 825  |  |  | $ | 868 | 
|                                            |  |                |       |  |         |   |     |          |              |   |      | 



42



---



##### Table of Contents





|                                   |  |                |     |  |         |   |     |          |              |   |      |  |  |   |   | 
|---------------------------------- |  | -------------- | --- |  | ------- | - | --- | -------- | ------------ | - | ---- |  |  | - | - | 
|                                   |  | Balance at     |     |  |         |   |     |          | Balance at   |  
|                                   |  | December 31,   |     |  |         |   |     |          | December 31, |  
|                                   |  | 2003           |     |  | Accrued |   |     | Utilized |              |   | 2004 | 
|                                   |  |                |     |  |         |   |     |          |              |   |      | 
|                                   |  | (In thousands) |    
|Facility closing and related costs |  | $              | 363 |  |         | $ | (36 | )        |              | $ | 324  |  |  | $ | 3 | 
|                                   |  |                |     |  |         |   |     |          |              |   |      | 





|                                   |  |                |     |  |         |   |          |  |              |      |     |  |  |   |     | 
|---------------------------------- |  | -------------- | --- |  | ------- | - | -------- |  | ------------ | ---- | --- |  |  | - | --- | 
|                                   |  | Balance at     |     |  |         |   |          |  | Balance at   |     
|                                   |  | December 31,   |     |  |         |   |          |  | December 31, |     
|                                   |  | 2003           |     |  | Accrued |   | Utilized |  |              | 2004 |    
|                                   |  |                |     |  |         |   |          |  |              |      |    
|                                   |  | (In thousands) |    
|Facility closing and related costs |  | $              | 622 |  |         | $ |         |  |              | $    | 339 |  |  | $ | 283 | 
|                                   |  |                |     |  |         |   |          |  |              |      |     | 

Inflation




Recent Accounting Pronouncements




Risk Factors


If One or More of Our Major Clients Stops Using Our Products
or Services or Changes the Combination of Products and Services
It Uses, Our Operating Results Would Suffer Significantly.




43



---



##### Table of Contents





Certain of Our Revenues Are Uncertain Because Our Clients May
Reduce the Amounts of or Change the Combination of Our Products
or Services They Purchase.






Our Revenues Are Concentrated in the Wireless
Telecommunications Industry, Which Is Experiencing Declining
Growth Rates, Consolidation and Increasing Pressure to Control
Costs.




44



---



##### Table of Contents







| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to maintain our profit margins on sales of products
    and services to companies in the wireless telecommunications
    industry;
|
| |  | the financial condition of our clients and their continuing
    ability to pay us for services and products;                                  
|
| |  | our ability to develop and market new or enhanced products and
    services to new and existing clients;                                      
|
| |  | continued growth of the domestic wireless telecommunications
    markets;                                                                     
|
| |  | the number of carriers seeking to implement prepaid billing
    services; and                                                                 
|
| |  | our ability to increase sales of our products and services
    internationally.                                                               

Our Future Revenues May Be Uncertain Because of Reliance on
Third Parties for Marketing and Distribution.








We Have Made and May Continue to Make Acquisitions, Which
Involve Risks.






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We may experience difficulty in integrating and managing
    acquired businesses successfully and in realizing anticipated
    economic, operational and other benefits in a timely manner. The
    need to retain existing clients, employees, and sales and
    distribution channels of an acquired company and to integrate
    and manage differing corporate cultures can also present
    significant risks. If we are unable to successfully integrate
    and manage acquired businesses, we may incur substantial costs
    and delays or other operational, technical or financial problems.

45



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our acquisition of Authorize.Net significantly reduced our
    available cash and liquidity. In other future acquisitions, we
    may issue equity securities that could be dilutive to our
    shareholders or we may use our remaining cash, which may have an
    adverse effect on our liquidity. We also may incur additional
    debt and amortization expense related to intangible assets as a
    result of acquisitions. This additional debt and amortization
    expense, as well as the potential impairment of any purchased
    goodwill, may materially and adversely affect our business and
    operating results. We may also be required to make continuing
    investments in acquired products or technologies to bring them
    to market, which may negatively affect our cash flows and net
    income. In addition, we may assume contingent liabilities that
    may be difficult to estimate.
|
| |  | Acquisitions may divert managements attention from our
    existing business and may damage our relationships with our key
    clients and employees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

The Success of Our Growth Strategy Is Dependent on Our
Ability to Expand into New or Complementary Markets.






| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | growth in our targeted markets;                                                            
|
| |  | our ability to provide products and services to address the
    needs of those markets; and
|
| |  | competition in those markets.                                                              

If We Do Not Continue to Enhance Our Existing Products and
Services, and Develop or Acquire New Ones, We Will Not Be Able
to Compete Effectively.






| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | identify and anticipate emerging technological and market trends
    affecting the markets in which we do business;                                                                                              
|
| |  | enhance our current products and services in order to increase
    their functionality, features and cost-effectiveness to clients
    that are seeking to control costs and to meet regulatory
    requirements;
|
| |  | develop or acquire new products and services that meet emerging
    client needs, such as products and services for the online
    market;                                                                       
|
| |  | modify our products and services in response to changing
    business practices and technical requirements of our clients, as
    well as to new regulatory requirements;                                        
|
| |  | integrate our current and future products with third-party
    products; and                                                                                                                                     
|
| |  | create and maintain interfaces to changing client and third
    party systems.                                                                                                                                   



46



---



##### Table of Contents



We and Our Clients Must Comply with Complex and Changing Laws
and Regulations.












47



---



##### Table of Contents



On-Demand Voice Conferencing Services May Become Subject to
Traditional Telecommunications Carrier Regulation by Federal and
State Authorities, Which Would Increase the Cost of Providing
Our Services, Require Us to Suspend Services to Existing
Clients, and May Subject Us to Penalties.




We Need to Continue to Improve or Implement our Procedures
and Controls.




Changes to Credit Card Association Rules or Practices Could
Adversely Impact Our Authorize.Net Business.




We Could Be Subject to Liability as a Result of Security
Breaches, Service Interruptions by Cyber Terrorists or
Fraudulent or Illegal Use of Our Services.




48



---



##### Table of Contents











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






Our Reliance on Suppliers and Vendors Could Adversely Affect
Our Ability to Provide Our Services and Products to Our Clients
on a Timely and Cost-Efficient Basis.






49



---



##### Table of Contents









Our Business May Be Harmed by Errors in Our Software.








| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we may suffer a loss of revenue if, due to software errors, we
    are temporarily unable to provide products or services to our
    clients;                                                                       
|
| |  | we may not be paid for the products or services provided to a
    client that contain errors, or we may be liable for losses or
    damages sustained by a client or its subscribers as a result of
    such errors;
|
| |  | we may incur additional unexpected expenses to correct errors in
    our software, or to fund product development projects that we
    may undertake to minimize the occurrences of such errors in the
    future;  
|
| |  | we may damage our relationships with clients or suffer a loss of
    reputation within our industry;                                                                                                                
|
| |  | we may become subject to litigation or regulatory
    scrutiny; and                                                                                                                                                 
|
| |  | our clients may terminate or fail to renew their agreements with
    us or reduce the products and services they purchase from us.                                                                                  



50



---



##### Table of Contents



Our Initiatives to Improve Our Software Design and
Development Processes May Not Be Successful.




Our Success Is Dependent in Part on PrePay, Which May Not
Achieve Market Penetration.




If We Are Unable to Make Successful Acquisitions , Our Future
Growth Will Be Limited.




We May Not Be Able to Successfully Manage Operational
Changes.




Our Quarterly Operating Results May Fluctuate.




51



---



##### Table of Contents







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Seasonal and retail trends affect our transaction revenues, in
    both our Payment Processing and TDS businesses, as well as our
    other products and services. Transaction revenues historically
    have represented the majority of our total revenues. As a
    result, our revenues can fluctuate. For example, our revenues
    generally have been highest in the fourth quarter of each
    calendar year, particularly in the holiday shopping season
    between Thanksgiving and Christmas. In addition, marketing
    initiatives undertaken by our clients or their competitors may
    significantly affect the number of transactions we process.
|
| |  | The sales process for our products and services offered to
    telecommunications clients is lengthy, sometimes exceeding
    twenty-four months. The length of the sales process makes our
    revenues difficult to predict. The delay of one or more large
    orders, particularly orders for software, which typically result
    in a substantial amount of non-recurring revenue, could cause
    our quarterly revenues to fall substantially below expectations.                                                                                                                                                                                          
|
| |  | We ship our software products within a short period after
    receipt of an order, and we usually do not have a material
    backlog of unfilled orders of software products. Consequently,
    our revenues from software licenses in any quarter depend
    substantially on the orders booked and shipped in that quarter.
    As a result, a delay in the consummation of a license agreement
    may cause our revenues to fall below expectations for that
    quarter.                                                                                                                                                                                      
|
| |  | Our consulting services revenues can fluctuate based on the
    timing of product sales and projects we perform for our clients.
    Many of our consulting engagements are of a limited duration, so
    it can be difficult for us to forecast consulting services
    revenues or staffing requirements accurately more than a few
    months in advance.                                                                                                                                                                                                                                                                                                       







Our Foreign Sales and Operations Subject Us to Risks and
Concerns Which Could Negatively Affect Our Business Overall.






| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the imposition of financial and operational controls and
    regulatory restrictions by foreign governments;                                                                                                             
|
| |  | the need to comply with a wide variety of complex U.S. and
    foreign import and export laws and treaties;                                                                                                              
|
| |  | political and economic instability that may lead to reduced
    demand for our products and services;                                                                                                                    
|
| |  | changes in tariffs, taxes and other barriers that may reduce our
    ability to sell our solutions or may reduce the profitability of
    those solutions;                                                               
|
| |  | longer payment cycles and increased difficulties in collecting
    accounts receivable;                                                                                                                                  
|
| |  | fluctuations in interest and currency exchange rates, which may
    reduce our earnings if we denominate arrangements with
    international clients in the currency of the country in which
    our products or services

52



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | are provided, or with respect to arrangements with international
    clients that are U.S. dollar-denominated, which may make
    our systems less price-competitive;                                                                  
|
| |  | changes in technology standards, such as interfaces between
    products, that are developed by foreign groups and may require
    additional development efforts on our part or change the buying
    behavior of some of our clients;
|
| |  | reduced protection for intellectual property rights in some
    countries;                                                                                                                                                             
|
| |  | difficulties in managing a global network of distributors or
    representatives and in staffing and managing foreign subsidiary
    operations;                                                                                       
|
| |  | costs and risks of localizing systems in foreign countries;                                                                                                                                                                            
|
| |  | additional complications and expenses related to supporting
    products internationally; and                                                                                                                                          
|
| |  | the possibility that our purchase agreements may be governed by
    foreign laws that differ significantly from U.S. laws,
    which may limit our ability to enforce our rights under these
    agreements.                           

We Face Significant Competition for a Limited Supply of
Qualified Software Engineers, Consultants and Sales and
Marketing Personnel.




Changes in Management Could Affect Our Ability to Operate Our
Business.




We Face Competition from a Broad and Increasing Range of
Vendors.






| |   |                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | providers of online payment processing services, including
    VeriSign, CyberSource Corporation, Plug & Pay
    Technologies, Inc. and LinkPoint International, Inc.                                                                                                                                                                                  
|
| |  | software vendors that provide one or more customer acquisition,
    customer relationship management and retention or risk
    management solutions, including ECtel Ltd., TSI
    Telecommunications Services Inc. (TSI), Fair Isaac
    Corporation, Magnum Software Systems, Inc., American Management
    Systems, Incorporated and SLP Infoware;

53



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | telecommunications equipment vendors that market software-based
    solutions to complement their hardware offerings, such as
    Hewlett-Packard Company and Ericsson;                                                                                                                                                                                                                                                                                                                                     
|
| |  | service providers that offer customer acquisition, customer
    relationship management and retention, risk management or
    authentication services in connection with other services,
    including Choicepoint Inc., Visa U.S.A., Experian Information
    Solutions, Inc., Equifax, Inc., Lexis Nexis, Trans Union,
    L.L.C., Schlumberger Sema plc and Amdocs Ltd;                                                                                                                                  
|
| |  | information technology departments within larger carriers that
    have the ability to provide products and services that are
    competitive with those we offer;                                                                                                                                                                                                                                                                                                                                          
|
| |  | information technology vendors that offer wireless and internet
    software applications such as Oracle Corporation, Microsoft
    Corporation and International Business Machine Corporation;                                                                                                                                                                                                                                                                                                             
|
| |  | consulting firms or systems integrators that may offer
    competitive services or the ability to develop customized
    solutions for customer acquisition and qualification, customer
    relationship management and retention or risk management, such
    as American Management Systems, Incorporated, Accenture Ltd.,
    BearingPoint, Inc., PeopleSoft, Inc., Siebel Systems, Inc. and
    Cap Gemini Ernst & Young;                                                                               
|
| |  | software vendors of prepaid wireless billing products, including
    Boston Communications Group, Inc., Intervoice, Inc., Comverse
    Technology, Inc., Glenayre Technologies, Inc., VeriSign
    Telecommunications Services, Telemac Cellular Corporation, Fair,
    Isaac & Co. Inc., ORGA Kartensysteme GmbH, Schlumberger
    Sema plc, Alcatel USA, Priority Call Management, Lucent
    Technologies, Inc., Hewlett-Packard Company (Tandem Division),
    Telcordia Technologies, Inc. and Sixbell;
|
| |  | a number of alternative technologies, including profilers,
    personal identification numbers and authentication, provided by
    companies such as Verizon Communications, Inc., Authentix
    Network Inc. and Fair Isaac Corporation;                                                                                                                                                                                                                                                                   
|
| |  | vendors that provide products and services in the wireless data
    market, such as Bridgewater Systems Corporation, OracleMobile, a
    division of Oracle Corporation, 4thPass, Inc., TSI, Seven
    Networks, Inc. and Openwave Systems Inc.; and                                                                                                                                                                                                                                                        
|
| |  | vendors that provide or resell products and services in the
    voice conferencing market such as Spectel, Inc., Polycom Inc.,
    Raindance Communications, Inc., Ptek Holdings, Inc., and the
    major worldwide telecommunications providers such as AT&T,
    Sprint, and Global Crossing Limited.                                                                                                                                                                                                     





A Failure of, Error in or Damage to Our Computer and
Telecommunications Systems Would Impair Our Ability to Conduct
Transactions, Payment Processing and Support Services and Harm
Our Business Operations.




54



---



##### Table of Contents





Our Success Depends in Part on Our Ability to Obtain Patents
for, or Otherwise Protect, Our Proprietary Technologies.










We May Become a Party to Intellectual Property Infringement
Claims, Which Could Harm Our Business.


Net MoneyIN, Inc. v. VeriSign,
Inc., et al


55



---



##### Table of Contents







Our Business Could Require Additional Financing.









|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk














|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data



56



---



##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements With Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures



|    |                                                 
|--- | ------------------------------------------------
|(a) | Evaluation of disclosure controls and procedures





|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(b) | Managements Annual Report on Internal Control Over
    Financial Reporting









|    |                                                     
|--- | ----------------------------------------------------
|(c) | Changes in internal control over financial reporting





|    |                                                                                     
|--- | ------------------------------------------------------------------------------------
|(d) | Scope of Managements Annual Report on Internal Control
    Over Financial Reporting







57



---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


















58



---



##### Table of Contents







DELOITTE & TOUCHE LLP






59



---



##### Table of Contents








|         |                  
|-------- | -----------------
|Item 9B. | Other Information






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant








|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services



60



---



##### Table of Contents






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

Documents filed as part of this report




| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Report of Independent Registered Public Accounting
    Firm  Deloitte & Touche LLP                     
| | Consolidated Balance Sheets as of December 31, 2004 and 2003                                            
| | Consolidated Statements of Operations for the years ended
    December 31, 2004, 2003 and 2002          
| | Consolidated Statements of Stockholders Equity for the
    years ended December 31, 2004, 2003 and 2002
| | Consolidated Statements of Cash Flows for the years ended
    December 31, 2004, 2003 and 2002          
| | Notes to Consolidated Financial Statements                                                              





| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | All schedules have been omitted because the required information
    either is not applicable or is shown in the financial statements
    or notes thereto.



|        |    |             |  |                                                                                                                                                                                                                                                    
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 2  | .1(1)       |  | Amended and Restated Agreement and Plan of Reorganization dated
    November 8, 2000 among the Company, Lightning Merger
    Corporation and Corsair Communications, Inc.                                                                          
|       
|        | 2  | .2(2)       |  | Stock Sale Agreement by and among InfoSpace, Inc., Go2Net, Inc.,
    Authorize.Net Corporation and Lightbridge, Inc. dated as of
    February 29, 2004.                                                                                            
|       
|        | 3  | .1(3)       |  | Amended and Restated Certificate of Incorporation of the Company                                                                                                                                                                                   
|       
|        | 3  | .2(3)       |  | Amended and Restated By-Laws of the Company                                                                                                                                                                                                        
|       
|        | 3  | .3(4)       |  | Amendment to Amended and Restated By-Laws of the Company,
    adopted October 29, 1998                                                                                                                                                             
|       
|        | 4  | .1(3)       |  | Specimen Certificate for Common Stock of the Company                                                                                                                                                                                               
|       
|        | 4  | .2(5)       |  | Rights Agreement dated as of November 14, 1997, between
    Lightbridge, Inc. and American Stock Transfer and Trust Company,
    as Rights Agent                                                                                                   
|       
|        | 4  | .3(5)       |  | Form of Certificate of Designation of Series A
    Participating Cumulative Preferred Stock of Lightbridge, Inc.                                                                                                                                   
|       
|        | 4  | .4(5)       |  | Form of Right Certificate                                                                                                                                                                                                                          
|       
|        | 10 | .1(3)       |  | 1991 Registration Rights Agreement dated February 11, 1991,
    as amended, between the Company and the persons named therein                                                                                                                      
|       
|        | 10 | .2(3)       |  | Subordinated Note and Warrant Purchase Agreement dated as of
    August 29, 1994 between the Company and the Purchasers
    named therein, including form of Subordinated 14% Promissory
    Notes and form of Common Stock Purchase Warrants      
|       
|        | 10 | .3(3)       |  | Form of Common Stock Purchase Warrants issued August 1995                                                                                                                                                                                          
|       
|        | 10 | .4(3)       |  | Settlement Agreement dated February 2, 1996 between the
    Company, BEB, Inc., BEB Limited Partnership I, BEB Limited
    Partnership II, BEB Limited Partnership III, BEB
    Limited Partnership IV, certain related parties and Brian
    Boyle
|       
|        | 10 | .5(3)       |  | 1990 Incentive and Nonqualified Stock Option Plan                                                                                                                                                                                                  
|       
|        | 10 | .6(3)       |  | 1996 Employee Stock Purchase Plan                                                                                                                                                                                                                  
|       
|        | 10 | .7(3)       |  | Employment Agreement dated August 16, 1996 between the
    Company and Pamela D.A. Reeve                                                                                                                                                           

61



---



##### Table of Contents



|        |    |         |             |                                                                                                                                                                                                                      
|------- | -- | ------- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |         |            
|No.     |    |         | Description
|        |    |         |            
|       
|        | 10 | .8(3)   |             | Letter Agreement, dated August 26, 1996, between the
    Company and Brian E. Boyle, including form of Common Stock
    Purchase Warrant and Registration Rights Agreement                                           
|       
|        | 10 | .9(3)   |             | Office Lease dated September 30, 1994, as amended, between
    the Company and Hobbs Brook Office Park                                                                                                               
|       
|        | 10 | .10(6)  |             | Office Lease dated March 5, 1997, between the Company and
    Sumitomo Life Realty (N.Y.), Inc.                                                                                                                      
|       
|        | 10 | .11(7)  |             | First and Second Amendments dated July 22, 1997 and
    October 6, 1997, respectively, to the Office Lease included
    as Item 10.10                                                                                
|       
|        | 10 | .12(8)  |             | Office Building Lease, dated March 12, 1998, between 8900
    Grantline Road Investors and the Company                                                                                                               
|       
|        | 10 | .13(9)  |             | Third and Fourth Amendments dated March 15, 1999 and
    July 16, 1999, respectively, to the office lease included
    as Item 10.10                                                                                 
|       
|        | 10 | .14(9)  |             | Office Lease dated October 4, 1999, between the Company and
    New Alliance Properties, Inc.                                                                                                                        
|       
|        | 10 | .15(9)  |             | First Amendment dated September 20, 1999 to the Office
    Lease included as Item 10.9                                                                                                                               
|       
|        | 10 | .16(10) |             | Fifth and Sixth Amendments dated March 10, 2000 to the
    office lease included as Item 10.10                                                                                                                       
|       
|        | 10 | .17(11) |             | Employment Agreement dated May 25, 2000 between the Company
    and Harlan Plumley                                                                                                                                   
|       
|        | 10 | .18(11) |             | 1996 Incentive and Non-Qualified Stock Option Plan (as amended)                                                                                                                                                      
|       
|        | 10 | .19(11) |             | 1998 Non-Statutory Stock Option Plan (as amended)                                                                                                                                                                    
|       
|        | 10 | .20(12) |             | Office lease dated August 15, 2000 between the Company and
    Arthur Pappathanasi, trustee of 330 Scangas Nominee Trust                                                                                             
|       
|        | 10 | .21(13) |             | Amendment to 1998 Non-Statutory Stock Option Plan adopted on
    November 16, 2000                                                                                                                                   
|       
|        | 10 | .22(14) |             | Amendment to 1996 Incentive and Non-Qualified Stock Option Plan                                                                                                                                                      
|       
|        | 10 | .23(15) |             | Amendment to 1996 Employee Stock Purchase Plan                                                                                                                                                                       
|       
|        | 10 | .24(16) |             | Memorandum Agreement between Harlan Plumley and the Company
    dated April 23, 2002                                                                                                                                 
|       
|        | 10 | .25(17) |             | Separation Agreement and Release between Carla Marcinowski and
    the Company dated June 28, 2002                                                                                                                   
|       
|        | 10 | .26(17) |             | Letter Agreement between Thomas Reynolds and the Company dated
    July 19, 2002                                                                                                                                     
|       
|        | 10 | .27(18) |             | Amendment to the Companys 1996 Employee Stock Purchase
    Plan, as amended                                                                                                                                         
|       
|        | 10 | .28(18) |             | Memorandum Agreement dated August 5, 2002 by and between
    the Company and Pamela D.A. Reeve                                                                                                                       
|       
|        | 10 | .29(18) |             | Memorandum Agreement dated August 5, 2002 by and between
    the Company and Judith Dumont                                                                                                                           
|       
|        | 10 | .30(19) |             | Foreign Exchange Master Agreement dated March 31, 2003 by
    and among Citizens Bank of Massachusetts, the Company, Corsair
    Communications, Inc., Coral Systems, Inc., and Lightbridge
    Security Corporation.
|       
|        | 10 | .31(20) |             | Separation agreement and release dated July 8,2003 between
    Christine Cournoyer and the Company                                                                                                                   
|       
|        | 10 | .32(21) |             | Office Building Lease, dated December 23, 2003 between
    Corporate Drive Corporation, as Trustee of Corporate Drive
    Nominee Realty Trust, and the Company                                                      
|       
|        | 10 | .33(2)  |             | Separation Agreement and Release between Michael Mitsock and the
    Company dated January 26, 2004                                                                                                                  

62



---



##### Table of Contents



|        |    |         |             |                                                                                                                                                              
|------- | -- | ------- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |         |            
|No.     |    |         | Description
|        |    |         |            
|       
|        | 10 | .34(2)  |             | Separation Agreement and Release between Stefan Gladyszewski and
    the Company dated January 26, 2004                                                      
|       
|        | 10 | .35(24) |             | Lease between Region of Queens Municipality, LTBG TeleServices
    ULC and Lightbridge, Inc. dated February 10, 2004                                         
|       
|        | 10 | .36(22) |             | Separation Agreement and Release between Harlan Plumley and the
    Company dated May 20, 2004                                                               
|       
|        | 10 | .37(22) |             | Amendment to the 1996 Stock Purchase Plan                                                                                                                    
|       
|        | 10 | .38(22) |             | 2004 Stock Incentive Plan                                                                                                                                    
|       
|        | 10 | .39(20) |             | Separation Agreement and Release between Pamela D.A. Reeve and
    the Company dated August 2, 2004                                                          
|       
|        | 10 | .40(20) |             | Employment Agreement between Robert E. Donahue and the Company
    dated August 2, 2004                                                                      
|       
|        | 10 | .41(20) |             | Office Lease Agreement between EOP Operating Limited Partnership
    and the Company dated as of August 10, 2004                                             
|       
|        | 10 | .42(20) |             | Terms and Conditions of Stock Options Granted Under the
    Lightbridge, Inc. 2004 Stock Incentive Plan                                                      
|       
|        | 10 | .43(20) |             | Form of Notice of Grant of Stock Options Under the Lightbridge,
    Inc. 2004 Stock Incentive Plan                                                           
|       
|        | 10 | .44(23) |             | Separation Agreement and Release between Edward DeArias and the
    Company dated October 28, 2004                                                           
|       
|        | 23 | .1      |             | Consent of Independent Registered Public Accounting
    Firm  Deloitte & Touche LLP                                                                         
|       
|        | 24 | .1      |             | Power of Attorney (See signature page hereto)                                                                                                                
|       
|        | 31 | .1      |             | Certification of Robert E. Donahue dated March 16, 2005                                                                                                      
|       
|        | 31 | .2      |             | Certification of Timothy C. OBrien dated March 16,
    2005                                                                                                 
|       
|        | 32 | .1      |             | Certification of Robert E. Donahue and Timothy C. OBrien
    dated March 16, 2005 (furnished but not filed with the
    Securities and Exchange Commission).






|    |                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Companys Registration
    Statement on Form S-4 (Registration Number 333-50196),
    as filed with the Securities and Exchange Commission on
    November 17, 2000.
|   
|(2) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended March 31, 2004.                                                                                   
|   
|(3) | Incorporated by reference to the Companys Registration
    Statement on Form S-1, as amended (File No. 333-6589).                                                                                   
|   
|(4) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended September 30, 1998.                                                                               
|   
|(5) | Incorporated by reference to the Companys Registration
    Statement on Form 8-A, as filed with the Securities and Exchange
    Commission on November 21, 1997.                                    
|   
|(6) | Incorporated by reference to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 1996.                                                                               
|   
|(7) | Incorporated by reference to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 1997.                                                                               
|   
|(8) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended March 31, 1998.                                                                                   
|   
|(9) | Incorporated by reference to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 1999.                                                                               

63



---



##### Table of Contents





|     |                                                                                                                       
|---- | ----------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended March 31, 2000.    
|    
|(11) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended June 30, 2000.     
|    
|(12) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended September 30, 2000.
|    
|(13) | Incorporated by reference to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2000.
|    
|(14) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended March 31, 2001.    
|    
|(15) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended June 30, 2001.     
|    
|(16) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended March 31, 2002.    
|    
|(17) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended June 30, 2002.     
|    
|(18) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended September 30, 2002.
|    
|(19) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended March 31, 2003.    
|    
|(20) | Incorporated by reference to the Companys Quarterly Report
    of Form 10-Q for the quarter ended September 30, 2004.
|    
|(21) | Incorporated by reference to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2003.       
|    
|(22) | Incorporated by reference to the Companys Quarterly Report
    on Form 10-Q for the quarter ended June 30, 2004.     
|    
|(23) | Incorporated by reference to the Companys Current Report
    on Form 8-K dated November 8, 2004.                     

64



---



##### Table of Contents






SIGNATURES






| |                  
| | -----------------
| | Lightbridge, Inc.



| |     |                      
| | --- | ---------------------
| | By: | /s/ Robert E. Donahue

| |                                      
| | -------------------------------------
| |                                      
| | Robert E. Donahue                    
| | President and Chief Executive Officer





|                                                 |  |                                                                                                                                        |  |                |  | 
|------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Name                                             |  | Title                                                                                                                                  |  | Date          
|                                                 |  |                                                                                                                                        |  |               
|                                                
|/s/ Timothy C.
    OBrienTimothy
    C. OBrien |  | Vice President, Finance and Administration, Chief Financial
    Officer and Treasurer (Principal Financial and Accounting
    Officer) |  | March 16, 2005
|                                                
|/s/ Robert E. DonahueRobert
    E. Donahue       |  | President, Chief Executive Officer and Director (Principal
    Executive Officer)                                                      |  | March 16, 2005
|                                                
|/s/ Rachelle B. ChongRachelle
    B. Chong       |  | Director                                                                                                                               |  | March 16, 2005
|                                                
|/s/ Gary HaroianGary
    Haroian                 |  | Director                                                                                                                               |  | March 16, 2005
|                                                
|/s/ Kevin C. MeliaKevin
    C. Melia             |  | Director                                                                                                                               |  | March 16, 2005
|                                                
|/s/ Andrew G. MillsAndrew
    G. Mills           |  | Director                                                                                                                               |  | March 16, 2005
|                                                
|/s/ David G. TurnerDavid
    G. Turner           |  | Director                                                                                                                               |  | March 16, 2005

65



---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


















|                              | 
|----------------------------- | 
|/s/ Deloitte &
    Touche LLP | 
|                              | 





F-1



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(Amounts in thousands except share and per share amounts)


|                                       |                                                                                                                                                                                                            |                            |                                            |         |         |         |       |         |         |         | 
|-------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ------- | ------- | ------- | ----- | ------- | ------- | ------- | 
|                                       |                                                                                                                                                                                                            | December 31,               |                                           
|                                       |                                                                                                                                                                                                            |                            |                                           
|                                       |                                                                                                                                                                                                            | 2004                       |                                            |         | 2003    |        
|                                       |                                                                                                                                                                                                            |                            |                                            |         |         |        
|ASSETS                                
|Current assets:                        |                                                                                                                                                                                                            |                            |                                            |         |         |         |       |        
|                                       | Cash and cash equivalents                                                                                                                                                                                  |                            | $                                          | 39,636  |         |         | $     | 69,685  |        
|                                       | Short-term investments                                                                                                                                                                                     |                            |                                            | 12,589  |         |         |       | 63,803  |        
|                                       | Accounts receivable, net                                                                                                                                                                                   |                            |                                            | 18,940  |         |         |       | 20,071  |        
|                                       | Deferred tax assets                                                                                                                                                                                        |                            |                                            |        |         |         |       | 3,267   |        
|                                       | Other current assets                                                                                                                                                                                       |                            |                                            | 3,132   |         |         |       | 4,158   |        
|                                       |                                                                                                                                                                                                            |                            |                                            |         |         |        
|                                       |                                                                                                                                                                                                            | Total current assets       |                                            |         | 74,297  |         |       |         | 160,984 |        
|Property and equipment, net            |                                                                                                                                                                                                            |                            | 16,978                                     |         |         |         | 9,408 |        
|Deferred tax assets                    |                                                                                                                                                                                                            |                            |                                           |         |         |         | 4,553 |        
|Other assets, net                      |                                                                                                                                                                                                            |                            | 336                                        |         |         |         | 362   |        
|Goodwill                               |                                                                                                                                                                                                            |                            | 57,628                                     |         |         |         | 1,664 |        
|Intangible assets, net                 |                                                                                                                                                                                                            |                            | 21,247                                     |         |         |         | 865   |        
|                                       |                                                                                                                                                                                                            |                            |                                            |         |         |        
|                                       |                                                                                                                                                                                                            | Total assets               |                                            | $       | 170,486 |         |       | $       | 177,836 |        
|                                       |                                                                                                                                                                                                            |                            |                                            |         |         |        
|                                      
|LIABILITIES AND STOCKHOLDERS EQUITY  
|Current liabilities:                   |                                                                                                                                                                                                            |                            |                                            |         |         |         |       |        
|                                       | Accounts payable                                                                                                                                                                                           |                            | $                                          | 7,300   |         |         | $     | 6,825   |        
|                                       | Accrued compensation and benefits                                                                                                                                                                          |                            |                                            | 5,073   |         |         |       | 4,493   |        
|                                       | Other accrued liabilities                                                                                                                                                                                  |                            |                                            | 4,113   |         |         |       | 3,887   |        
|                                       | Deferred rent                                                                                                                                                                                              |                            |                                            | 1,592   |         |         |       |        |        
|                                       | Deferred revenues                                                                                                                                                                                          |                            |                                            | 3,681   |         |         |       | 5,461   |        
|                                       | Funds due to merchants                                                                                                                                                                                     |                            |                                            | 5,558   |         |         |       |        |        
|                                       | Reserves for restructuring                                                                                                                                                                                 |                            |                                            | 3,383   |         |         |       | 2,634   |        
|                                       |                                                                                                                                                                                                            |                            |                                            |         |         |        
|                                       |                                                                                                                                                                                                            | Total current liabilities  |                                            |         | 30,700  |         |       |         | 23,300  |        
|Deferred rent, less current portion    |                                                                                                                                                                                                            |                            | 2,709                                      |         |         |         |      |        
|Other long-term liabilities            |                                                                                                                                                                                                            |                            | 149                                        |         |         |         | 33    |        
|                                       |                                                                                                                                                                                                            |                            |                                            |         |         |        
|                                       |                                                                                                                                                                                                            | Total liabilities          |                                            |         | 33,558  |         |       |         | 23,333  |        
|                                       |                                                                                                                                                                                                            |                            |                                            |         |         |        
|Commitments and contingencies (Note 8) |                                                                                                                                                                                                            |                            |                                            |         |         |         |       |        
|Stockholders equity:                  |                                                                                                                                                                                                            |                            |                                            |         |         |         |       |        
|                                       | Preferred stock; $0.01 par value, 5,000,000 shares
    authorized; no shares issued or outstanding at December 31,
    2004 and 2003                                                                       |                            |                                            |        |         |         |       |        |        
|                                       | Common stock; $0.01 par value, 60,000,000 shares
    authorized; 29,951,826 and 29,647,795 shares issued;
    26,512,783 and 26,843,352 shares outstanding at
    December 31, 2004 and 2003, respectively |                            |                                            | 300     |         |         |       | 298     |        
|                                       | Additional paid-in capital                                                                                                                                                                                 |                            |                                            | 167,465 |         |         |       | 166,882 |        
|                                       | Warrants                                                                                                                                                                                                   |                            |                                            | 206     |         |         |       | 206     |        
|                                       | Foreign currency translation                                                                                                                                                                               |                            |                                            | (184    | )       |         |       |        |        
|                                       | Retained earnings                                                                                                                                                                                          |                            |                                            | (10,072 | )       |         |       | 4,072   |        
|                                       | Less treasury stock; 3,439,043 and 2,804,443 shares at cost
    at December 31, 2004 and 2003, respectively                                                                                                |                            |                                            | (20,787 | )       |         |       | (16,955 | )      
|                                       |                                                                                                                                                                                                            |                            |                                            |         |         |        
|                                       |                                                                                                                                                                                                            | Total stockholders equity |                                            |         | 136,928 |         |       |         | 154,503 |        
|                                       |                                                                                                                                                                                                            |                            |                                            |         |         |        
|                                       |                                                                                                                                                                                                            |                            | Total liabilities and stockholders equity |         | $       | 170,486 |       |         | $       | 177,836 | 
|                                       |                                                                                                                                                                                                            |                            |                                            |         |         |        



F-2



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


(Amounts in thousands except per share amounts)


|                                                |                                               |                          |         |         |         |   |        |        |         |   |       |        |         | 
|----------------------------------------------- | --------------------------------------------- | ------------------------ | ------- | ------- | ------- | - | ------ | ------ | ------- | - | ----- | ------ | ------- | 
|                                                |                                               | Years Ended December 31, |        
|                                                |                                               |                          |        
|                                                |                                               | 2004                     |         |         | 2003    |   |        | 2002   |        
|                                                |                                               |                          |         |         |         |   |        |        |        
|Revenues:                                       |                                               |                          |         |         |         |   |        |        |         |   |       |       
|                                                | Transaction services                          |                          | $       | 103,648 |         |   | $      | 80,552 |         |   | $     | 88,376 |        
|                                                | Consulting and maintenance services           |                          |         | 19,898  |         |   |        | 28,666 |         |   |       | 32,491 |        
|                                                | Software licensing and hardware               |                          |         | 9,509   |         |   |        | 10,760 |         |   |       | 12,571 |        
|                                                |                                               |                          |         |         |         |   |        |        |        
|                                                |                                               | Total revenues           |         |         | 133,055 |   |        |        | 119,978 |   |       |        | 133,438 | 
|Cost of revenues:                               |                                               |                          |         |         |         |   |        |        |         |   |       |       
|                                                | Transaction services                          |                          |         | 54,831  |         |   |        | 45,667 |         |   |       | 49,194 |        
|                                                | Consulting and maintenance services           |                          |         | 9,930   |         |   |        | 12,741 |         |   |       | 13,663 |        
|                                                | Software licensing and hardware               |                          |         | 3,129   |         |   |        | 3,541  |         |   |       | 3,086  |        
|                                                |                                               |                          |         |         |         |   |        |        |        
|                                                |                                               | Total cost of revenues   |         |         | 67,890  |   |        |        | 61,949  |   |       |        | 65,943  | 
|                                                |                                               |                          |         |         |         |   |        |        |        
|Gross profit:                                   |                                               |                          |         |         |         |   |        |        |         |   |       |       
|                                                | Transaction services                          |                          |         | 48,817  |         |   |        | 34,885 |         |   |       | 39,182 |        
|                                                | Consulting and maintenance services           |                          |         | 9,968   |         |   |        | 15,925 |         |   |       | 18,828 |        
|                                                | Software licensing and hardware               |                          |         | 6,380   |         |   |        | 7,219  |         |   |       | 9,485  |        
|                                                |                                               |                          |         |         |         |   |        |        |        
|                                                |                                               | Total gross profit       |         |         | 65,165  |   |        |        | 58,029  |   |       |        | 67,495  | 
|                                                |                                               |                          |         |         |         |   |        |        |        
|Operating expenses:                             |                                               |                          |         |         |         |   |        |        |         |   |       |       
|                                                | Engineering and development                   |                          |         | 29,000  |         |   |        | 28,426 |         |   |       | 29,269 |        
|                                                | Sales and marketing                           |                          |         | 22,541  |         |   |        | 14,239 |         |   |       | 13,270 |        
|                                                | General and administrative                    |                          |         | 15,987  |         |   |        | 14,143 |         |   |       | 18,170 |        
|                                                | Restructuring                                 |                          |         | 4,346   |         |   |        | 5,079  |         |   |       | 3,616  |        
|                                                | Impairment of goodwill                        |                          |         | 1,664   |         |   |        |       |         |   |       |       |        
|                                                | Impairment of other intangible assets         |                          |         | 599     |         |   |        |       |         |   |       |       |        
|                                                | Purchased in-process research and development |                          |         | 679     |         |   |        |       |         |   |       | 1,618  |        
|                                                | Gain on sale of Fraud Centurion assets        |                          |         | (2,673  | )       |   |        |       |         |   |       |       |        
|                                                |                                               |                          |         |         |         |   |        |        |        
|                                                |                                               | Total operating expenses |         |         | 72,143  |   |        |        | 61,887  |   |       |        | 65,943  | 
|                                                |                                               |                          |         |         |         |   |        |        |        
|Income (loss) from operations                   |                                               |                          | (6,978  | )       |         |   | (3,858 | )      |         |   | 1,552 |       
|Other income (expense):                         |                                               |                          |         |         |         |   |        |        |         |   |       |       
|                                                | Interest income                               |                          |         | 1,185   |         |   |        | 1,778  |         |   |       | 2,439  |        
|                                                | Equity in loss of partnership investment      |                          |         |        |         |   |        | (471   | )       |   |       | (464   | )      
|                                                |                                               |                          |         |         |         |   |        |        |        
|                                                |                                               | Total other income, net  |         |         | 1,185   |   |        |        | 1,307   |   |       |        | 1,975   | 
|                                                |                                               |                          |         |         |         |   |        |        |        
|Income (loss) before provision for income taxes |                                               |                          | (5,793  | )       |         |   | (2,551 | )      |         |   | 3,527 |       
|Provision for (benefit from) income taxes       |                                               |                          | 8,351   |         |         |   | (1,102 | )      |         |   | (103  | )     
|                                                |                                               |                          |         |         |         |   |        |        |        
|Net income (loss)                               |                                               | $                        | (14,144 | )       |         | $ | (1,449 | )      |         | $ | 3,630 |       
|                                                |                                               |                          |         |         |         |   |        |        |        
|                                                | Basic earnings (loss) per share (Note 12)     |                          | $       | (0.53   | )       |   | $      | (0.05  | )       |   | $     | 0.13   |        
|                                                |                                               |                          |         |         |         |   |        |        |        
|                                                | Diluted earnings (loss) per share (Note 12)   |                          | $       | (0.53   | )       |   | $      | (0.05  | )       |   | $     | 0.13   |        
|                                                |                                               |                          |         |         |         |   |        |        |        



F-3



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


(Amounts in thousands)


|                                                             |  |              |        |   |            |   |     |          |  |   |            |          |  |             |      |              |          |   |                |          |  |               |        |  |  |        |         |   |        |  |       |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------ |  | ------------ | ------ | - | ---------- | - | --- | -------- |  | - | ---------- | -------- |  | ----------- | ---- | ------------ | -------- | - | -------------- | -------- |  | ------------- | ------ |  |  | ------ | ------- | - | ------ |  | ----- | - |  | - | ------- | - |  | - | ------- | -
|                                                             |  |              |        |   |            |   |     |          |  |   |            | Retained |  |             |      |              |         
|                                                             |  | Common Stock |        |   | Additional |   |     | Foreign  |  |   | Receivable |          |  |             |      | Earnings     |          |   | Treasury Stock |          |  | Total         |       
|                                                             |  |              |        |   | Paid-in    |   |     | Currency |  |   | From       |          |  |             |      | (Accumulated |          |   |                |          |  | Stockholders |       
|                                                             |  | Shares       |        |   | Amount     |   |     | Capital  |  |   | Gain/Loss  |          |  | Stockholder |      |              | Warrants |   |                | Deficit) |  |               | Shares |  |  | Amount |         |   | Equity | 
|                                                             |  |              |        |   |            |   |     |          |  |   |            |          |  |             |      |              |          |   |                |          |  |               |        |  |  |        |         |   |        | 
|Balance, January 1, 2002                                     |  |              | 29,093 |   |            |   | 291 |          |  |   | 162,367    |          |  |             |     |              |          |   | (115           | )        |  |               | 206    |  |  |        | 1,891   |   |        |  | 1,091 |   |  |   | (3,118  | ) |  |   | 161,522 |  
|Issuance of common stock for cash                            |  |              | 72     |   |            |   | 1   |          |  |   | 584        |          |  |             |     |              |          |   |               |          |  |               |       |  |  |        |        |   |        |  |      |   |  |   |        |   |  |   | 585     |  
|Exercise of common stock options                             |  |              | 394    |   |            |   | 4   |          |  |   | 2,118      |          |  |             |     |              |          |   |               |          |  |               |       |  |  |        |        |   |        |  |      |   |  |   |        |   |  |   | 2,122   |  
|Retirement of treasury stock                                 |  |              | (158   | ) |            |   |    |          |  |   |           |          |  |             |     |              |          |   |               |          |  |               |       |  |  |        |        |   |        |  | (158  | ) |  |   |        |   |  |   |        |  
|Repurchase of common stock                                   |  |              |       |   |            |   |    |          |  |   |           |          |  |             |     |              |          |   |               |          |  |               |       |  |  |        |        |   |        |  | 1,186 |   |  |   | (8,505  | ) |  |   | (8,505  | )
|Tax benefit from disqualifying dispositions of stock options |  |              |       |   |            |   |    |          |  |   | 172        |          |  |             |     |              |          |   |               |          |  |               |       |  |  |        |        |   |        |  |      |   |  |   |        |   |  |   | 172     |  
|Shareholder note written off as uncollectible                |  |              |       |   |            |   |    |          |  |   |           |          |  |             |     |              |          |   | 115            |          |  |               |       |  |  |        |        |   |        |  |      |   |  |   |        |   |  |   | 115     |  
|Net income                                                   |  |              |       |   |            |   |    |          |  |   |           |          |  |             |     |              |          |   |               |          |  |               |       |  |  |        | 3,630   |   |        |  |      |   |  |   |        |   |  |   | 3,630   |  
|                                                             |  |              |        |   |            |   |     |          |  |   |            |          |  |             |      |              |          |   |                |          |  |               |        |  |  |        |         |   |        | 
|Balance, December 31, 2002                                   |  |              | 29,401 |   |            |   | 296 |          |  |   | 165,241    |          |  |             |     |              |          |   |               |          |  |               | 206    |  |  |        | 5,521   |   |        |  | 2,119 |   |  |   | (11,623 | ) |  |   | 159,641 |  
|Issuance of common stock for cash                            |  |              | 84     |   |            |   |    |          |  |   | 435        |          |  |             |     |              |          |   |               |          |  |               |       |  |  |        |        |   |        |  |      |   |  |   |        |   |  |   | 435     |  
|Exercise of common stock options                             |  |              | 163    |   |            |   | 2   |          |  |   | 995        |          |  |             |     |              |          |   |               |          |  |               |       |  |  |        |        |   |        |  |      |   |  |   |        |   |  |   | 997     |  
|Repurchase of common stock                                   |  |              |       |   |            |   |    |          |  |   |           |          |  |             |     |              |          |   |               |          |  |               |       |  |  |        |        |   |        |  | 685   |   |  |   | (5,332  | ) |  |   | (5,332  | )
|Tax benefit from disqualifying dispositions of stock options |  |              |       |   |            |   |    |          |  |   | 211        |          |  |             |     |              |          |   |               |          |  |               |       |  |  |        |        |   |        |  |      |   |  |   |        |   |  |   | 211     |  
|Net loss                                                     |  |              |       |   |            |   |    |          |  |   |           |          |  |             |     |              |          |   |               |          |  |               |       |  |  |        | (1,449  | ) |        |  |      |   |  |   |        |   |  |   | (1,449  | )
|                                                             |  |              |        |   |            |   |     |          |  |   |            |          |  |             |      |              |          |   |                |          |  |               |        |  |  |        |         |   |        | 
|Balance, December 31, 2003                                   |  |              | 29,648 |   |            | $ | 298 |          |  | $ | 166,882    |          |  | $           |     |              |          | $ |               |          |  | $             | 206    |  |  | $      | 4,072   |   |        |  | 2,804 |   |  | $ | (16,955 | ) |  | $ | 154,503 |  
|                                                             |  |              |        |   |            |   |     |          |  |   |            |          |  |             |      |              |          |   |                |          |  |               |        |  |  |        |         |   |        | 
|Issuance of common stock for cash                            |  |              | 84     |   |            |   |    |          |  |   | 395        |          |  |             |     |              |          |   |               |          |  |               |       |  |  |        |        |   |        |  |      |   |  |   |        |   |  |   | 395     |  
|Exercise of common stock options                             |  |              | 220    |   |            |   | 2   |          |  |   | 148        |          |  |             |     |              |          |   |               |          |  |               |       |  |  |        |        |   |        |  |      |   |  |   |        |   |  |   | 150     |  
|Repurchase of common stock                                   |  |              |       |   |            |   |    |          |  |   |           |          |  |             |     |              |          |   |               |          |  |               |       |  |  |        |        |   |        |  | 635   |   |  |   | (3,832  | ) |  |   | (3,832  | )
|Foreign currency gain/loss                                   |  |              |       |   |            |   |    |          |  |   |           |          |  |             | (184 | )            |          |   |               |          |  |               |       |  |  |        |        |   |        |  |      |   |  |   |        |   |  |   | (184    | )
|Tax benefit from disqualifying dispositions of stock options |  |              |       |   |            |   |    |          |  |   | 40         |          |  |             |     |              |          |   |               |          |  |               |       |  |  |        |        |   |        |  |      |   |  |   |        |   |  |   | 40      |  
|Net loss                                                     |  |              |       |   |            |   |    |          |  |   |           |          |  |             |     |              |          |   |               |          |  |               |       |  |  |        | (14,144 | ) |        |  |      |   |  |   |        |   |  |   | (14,144 | )
|                                                             |  |              |        |   |            |   |     |          |  |   |            |          |  |             |      |              |          |   |                |          |  |               |        |  |  |        |         |   |        | 
|Balance, December 31, 2004                                   |  |              | 29,952 |   |            | $ | 300 |          |  | $ | 167,465    |          |  | $           | (184 | )            |          | $ |               |          |  | $             | 206    |  |  | $      | (10,072 | ) |        |  | 3,439 |   |  | $ | (20,787 | ) |  | $ | 136,928 |  
|                                                             |  |              |        |   |            |   |     |          |  |   |            |          |  |             |      |              |          |   |                |          |  |               |        |  |  |        |         |   |        | 



F-4



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(Amounts in thousands)


|                                                                                                       |                                                              |                                                     |         |        |         |   |          |        |         |   |          |        |         |  
|------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------ | --------------------------------------------------- | ------- | ------ | ------- | - | -------- | ------ | ------- | - | -------- | ------ | ------- | -
|                                                                                                       |                                                              | Years Ended December 31,                            |        
|                                                                                                       |                                                              |                                                     |        
|                                                                                                       |                                                              | 2004                                                |         |        | 2003    |   |          | 2002   |        
|                                                                                                       |                                                              |                                                     |         |        |         |   |          |        |        
|Cash flows from operating activities:                                                                  |                                                              |                                                     |         |        |         |   |          |        |         |   |          |       
|Net income (loss)                                                                                      |                                                              | $                                                   | (14,144 | )      |         | $ | (1,449   | )      |         | $ | 3,630    |       
|Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities: |                                                              |                                                     |         |        |         |   |          |        |         |   |          |       
|                                                                                                       | Deferred income taxes                                        |                                                     |         | 7,820  |         |   |          | (1,095 | )       |   |          | 1,732  |        
|                                                                                                       | Purchased in-process research and development                |                                                     |         | 679    |         |   |          |       |         |   |          | 1,618  |        
|                                                                                                       | Depreciation and amortization                                |                                                     |         | 10,909 |         |   |          | 10,398 |         |   |          | 15,326 |        
|                                                                                                       | Loss on disposal of property and equipment                   |                                                     |         | 63     |         |   |          | 1,511  |         |   |          | 735    |        
|                                                                                                       | Gain on sale of Fraud Centurion assets                       |                                                     |         | (2,673 | )       |   |          |       |         |   |          |       |        
|                                                                                                       | Impairment of goodwill and intangibles                       |                                                     |         | 2,263  |         |   |          |       |         |   |          |       |        
|                                                                                                       | Tax benefit from disqualifying dispositions of stock options |                                                     |         | 40     |         |   |          | 211    |         |   |          | 172    |        
|Changes in assets and liabilities:                                                                     |                                                              |                                                     |         |        |         |   |          |        |         |   |          |       
|                                                                                                       | Accounts receivable                                          |                                                     |         | 2,967  |         |   |          | (2,392 | )       |   |          | 9,964  |        
|                                                                                                       | Inventories                                                  |                                                     |         |       |         |   |          |       |         |   |          | 263    |        
|                                                                                                       | Other assets                                                 |                                                     |         | 1,316  |         |   |          | (699   | )       |   |          | 2,298  |        
|                                                                                                       | Accounts payable and accrued liabilities                     |                                                     |         | 528    |         |   |          | 1,359  |         |   |          | (3,361 | )      
|                                                                                                       | Funds due to merchants                                       |                                                     |         | (839   | )       |   |          |       |         |   |          |       |        
|                                                                                                       | Other long-term liabilities                                  |                                                     |         | 116    |         |   |          | (226   | )       |   |          | (408   | )      
|                                                                                                       | Deferred rent                                                |                                                     |         | 4,301  |         |   |          |       |         |   |          |       |        
|                                                                                                       | Deferred revenues                                            |                                                     |         | (1,252 | )       |   |          | 1,169  |         |   |          | (1,952 | )      
|                                                                                                       |                                                              |                                                     |         |        |         |   |          |        |        
|                                                                                                       |                                                              | Net cash provided by operating activities           |         |        | 12,094  |   |          |        | 8,787   |   |          |        | 30,017  |  
|                                                                                                       |                                                              |                                                     |         |        |         |   |          |        |        
|Cash flows from investing activities:                                                                  |                                                              |                                                     |         |        |         |   |          |        |         |   |          |       
|Purchases of property and equipment                                                                    |                                                              |                                                     | (14,743 | )      |         |   | (4,869   | )      |         |   | (4,370   | )     
|Purchase of investments                                                                                |                                                              |                                                     | (33,490 | )      |         |   | (179,385 | )      |         |   | (119,539 | )     
|Net cash proceeds from the sale of Fraud Centurion assets                                              |                                                              |                                                     | 2,374   |        |         |   |         |        |         |   |         |       
|Proceeds from sales and maturities of short-term investments                                           |                                                              |                                                     | 84,705  |        |         |   | 158,388  |        |         |   | 87,804   |       
|Acquisition of Authorize.Net, net of cash acquired                                                     |                                                              |                                                     | (77,510 | )      |         |   |         |        |         |   |         |       
|Acquisition of Altawave                                                                                |                                                              |                                                     |        |        |         |   |         |        |         |   | (4,949   | )     
|                                                                                                       |                                                              |                                                     |         |        |         |   |          |        |        
|                                                                                                       |                                                              | Net cash provided by (used in) investing activities |         |        | (38,664 | ) |          |        | (25,866 | ) |          |        | (41,054 | )
|                                                                                                       |                                                              |                                                     |         |        |         |   |          |        |        
|Cash flows from financing activities:                                                                  |                                                              |                                                     |         |        |         |   |          |        |         |   |          |       
|Repurchases of common stock                                                                            |                                                              |                                                     | (3,832  | )      |         |   | (5,332   | )      |         |   | (8,505   | )     
|Proceeds from issuance of common stock                                                                 |                                                              |                                                     | 545     |        |         |   | 1,432    |        |         |   | 2,707    |       
|                                                                                                       |                                                              |                                                     |         |        |         |   |          |        |        
|                                                                                                       |                                                              | Net cash provided by (used in) financing activities |         |        | (3,287  | ) |          |        | (3,900  | ) |          |        | (5,798  | )
|                                                                                                       |                                                              |                                                     |         |        |         |   |          |        |        
|Effects of foreign exchange rate changes on cash and cash
    equivalents                              |                                                              |                                                     | (192    | )      |         |   |         |        |         |   |         |       
|Net increase (decrease) in cash and cash equivalents                                                   |                                                              |                                                     | (30,049 | )      |         |   | (20,979  | )      |         |   | (16,835  | )     
|Cash and cash equivalents, beginning of year                                                           |                                                              |                                                     | 69,685  |        |         |   | 90,664   |        |         |   | 107,499  |       
|                                                                                                       |                                                              |                                                     |         |        |         |   |          |        |        
|Cash and cash equivalents, end of year                                                                 |                                                              | $                                                   | 39,636  |        |         | $ | 69,685   |        |         | $ | 90,664   |       
|                                                                                                       |                                                              |                                                     |         |        |         |   |          |        |        



F-5



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                                  
|-- | ---------------------------------
|1. | Business and Acquisition Activity

Business


Asset Purchase




|                                    |  |                 |      |  
|----------------------------------- |  | --------------- | ---- | -
|                                    |  | Estimated       |     
|                                    |  | Fair Values     |     
|                                    |  |                 |     
|                                    |  | ($ in millions) |     
|Acquired technology                 |  | $               | 1.3  |  
|Fixed assets                        |  |                 | 0.3  |  
|Goodwill                            |  |                 | 1.7  |  
|In-process research and development |  |                 | 1.6  |  
|Acquisition costs accrued           |  |                 | (0.6 | )
|Operating liabilities assumed       |  |                 | (0.3 | )
|                                    |  |                 |     
|Total cash purchase price           |  | $               | 4.0  |  
|                                    |  |                 |     







F-6



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Asset Purchase




|                                |                                       |   |        |        |  
|------------------------------- | ------------------------------------- | - | ------ | ------ | -
|Tangible assets acquired:       |                                       |   |        |       
|                                | Cash and cash equivalents             |   | $      | 6,097  |  
|                                | Accounts receivable                   |   |        | 1,815  |  
|                                | Property and equipment                |   |        | 1,655  |  
|                                | Other assets                          |   |        | 265    |  
|Liabilities assumed:            |                                       |   |        |       
|                                | Accounts payable and accrued expenses |   |        | (1,498 | )
|                                | Funds due to merchants                |   |        | (6,397 | )
|Identifiable intangible assets: |                                       |   |        |       
|                                | In-process research and development   |   |        | 679    |  
|                                | ISO network                           |   |        | 9,300  |  
|                                | Merchant customer base                |   |        | 7,000  |  
|                                | Trademarks                            |   |        | 3,600  |  
|                                | Existing technology                   |   |        | 3,162  |  
|                                | Processor relationships               |   |        | 300    |  
|                                | Goodwill                              |   |        | 57,629 |  
|                                |                                       |   |       
|Total allocated purchase price  |                                       | $ | 83,607 |       
|                                |                                       |   |       



F-7



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














Pro forma financial information




F-8



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                               |  |                               |         |   |              |   |         |  
|---------------------------------------------- |  | ----------------------------- | ------- | - | ------------ | - | ------- | -
|                                               |  | December 31,                  |         |   | December 31, |  
|                                               |  | 2004                          |         |   | 2003         |  
|                                               |  |                               |         |   |              |  
|                                               |  | (Amounts in thousands, except |        
|                                               |  | per share amounts)            |        
|Pro forma net revenues                         |  | $                             | 141,307 |   |              | $ | 147,803 |  
|                                               |  |                               |         |   |              |  
|Pro forma net loss                             |  | $                             | (12,309 | ) |              | $ | (1,677  | )
|                                               |  |                               |         |   |              |  
|Pro forma net loss per basic and diluted share |  | $                             | (0.46   | ) |              | $ | (0.06   | )
|                                               |  |                               |         |   |              |  
|Shares used for basic and diluted computation  |  |                               | 26,643  |   |              |   | 27,015  |  
|                                               |  |                               |         |   |              |  

Asset Sale






|   |                                           
|-- | ------------------------------------------
|2. | Summary of Significant Accounting Policies

Basis of Presentation and Principles of
Consolidation


Significant Estimates


Financial Instruments


Cash and Cash Equivalents


F-9



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Short-Term Investments




Property and Equipment


Deferred rent


Revenue Recognition and Concentration of Credit
Risk






F-10



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|                             |       |                      |    |    |      |  |    |      |   |  |    |    |  
|---------------------------- | ----- | -------------------- | -- | -- | ---- |  | -- | ---- | - |  | -- | -- | -
|                             |       | Years Ended Dec. 31, |   
|                             |       |                      |   
|                             |       | 2004                 |    |    | 2003 |  |    | 2002 |  
|                             |       |                      |    |    |      |  |    |      |  
|Sprint Spectrum L.P.         |       |                      | 21 | %  |      |  | 28 | %    |   |  | 30 | % 
|AT&T Wireless Services, Inc. |       |                      | 16 |    |      |  | 21 |      |   |  | 21 |   
|Ericsson AB                  |       |                      | *  |    |      |  | 14 |      |   |  | 15 |   
|Nextel Operations, Inc.      |       |                      | 11 |    |      |  | 12 |      |   |  | 11 |   
|                             |       |                      |    |    |      |  |    |      |  
|                             | Total |                      |    | 48 | %    |  |    | 75   | % |  |    | 77 | %
|                             |       |                      |    |    |      |  |    |      |  






|  |                                                      
|- | -----------------------------------------------------
|* |  Represents less than 10% of total revenues in 2004.

F-11



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Export Sales


|              |       |      |        |        |      |   |       |        |  |   |        |        | 
|------------- | ----- | ---- | ------ | ------ | ---- | - | ----- | ------ |  | - | ------ | ------ | 
|              |       | 2004 |        |        | 2003 |   |       | 2002   | 
|              |       |      |        |        |      |   |       |        | 
|Latin America |       | $    | 10,079 |        |      | $ | 9,240 |        |  | $ | 10,436 |       
|Mexico        |       |      | 4,084  |        |      |   | 6,191 |        |  |   | 9,299  |       
|Africa        |       |      | 465    |        |      |   | 1,476 |        |  |   | 803    |       
|Canada        |       |      | 485    |        |      |   | 604   |        |  |   | 748    |       
|Asia          |       |      | 12     |        |      |   | 79    |        |  |   | 273    |       
|Russia        |       |      | 38     |        |      |   | 947   |        |  |   | 169    |       
|Europe        |       |      | 60     |        |      |   | 120   |        |  |   | 157    |       
|              |       |      |        |        |      |   |       |        | 
|              | Total |      | $      | 15,223 |      |   | $     | 18,657 |  |   | $      | 21,885 | 
|              |       |      |        |        |      |   |       |        | 

Goodwill and Acquired Intangible Assets








|                   |                          |      |        |        |      |  |       |       |  
|------------------ | ------------------------ | ---- | ------ | ------ | ---- |  | ----- | ----- | -
|                   |                          | 2004 |        |        | 2003 | 
|                   |                          |      |        |        |      | 
|Intangible Assets: |                          |      |        |        |      |  |       |      
|                   | Existing technology      |      | $      | 3,162  |      |  | $     | 1,330 |  
|                   | Reseller network         |      |        | 9,300  |      |  |       |      |  
|                   | Merchant customer base   |      |        | 7,000  |      |  |       |      |  
|                   | Trademarks               |      |        | 3,600  |      |  |       |      |  
|                   | Processor relationships  |      |        | 300    |      |  |       |      |  
|                   |                          |      |        |        |      | 
|                   |                          |      | 23,362 |        |      |  | 1,330 |      
|                   | Accumulated amortization |      |        | (2,115 | )    |  |       | (465  | )
|                   |                          |      |        |        |      | 
|                   | Net                      |      | $      | 21,247 |      |  | $     | 865   |  
|                   |                          |      |        |        |      | 

F-12



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                  |  |              |        | 
|--------------------------------- |  | ------------ | ------ | 
|                                  |  | Amortization |       
|                                  |  |              |       
|2005                              |  | $            | 2,832  | 
|2006                              |  |              | 2,832  | 
|2007                              |  |              | 2,832  | 
|2008                              |  |              | 2,832  | 
|2009                              |  |              | 1,319  | 
|Thereafter                        |  |              | 5,000  | 
|                                  |  |              |       
|Total future amortization expense |  | $            | 16,647 | 
|                                  |  |              |       

Income Taxes


Warranty Reserve


Development Costs


Foreign Currency Translation




| |                                   
| | ----------------------------------
| | Supplemental Cash Flow Information

|                   |                            |                          |   |       |      |  |   |      |  |  |   |       | 
|------------------ | -------------------------- | ------------------------ | - | ----- | ---- |  | - | ---- |  |  | - | ----- | 
|                   |                            | Years Ended December 31, |  
|                   |                            |                          |  
|                   |                            | 2004                     |   |       | 2003 |  |   | 2002 | 
|                   |                            |                          |   |       |      |  |   |      | 
|                   |                            | (In thousands)           |  
|Supplemental Item: |                            |                          |   |       |      |  |   |      |  |  |   |      
|                   | Cash paid for income taxes |                          | $ | 2,004 |      |  | $ | 373  |  |  | $ | 3,925 | 

Impairment of Long-Lived Assets


F-13



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Stock-Based Compensation






|                                                                               |  |                       |         |   |      |   |        |      |  |   |       | 
|------------------------------------------------------------------------------ |  | --------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ----- | 
|                                                                               |  | 2004                  |         |   | 2003 |   |        | 2002 | 
|                                                                               |  |                       |         |   |      |   |        |      | 
|                                                                               |  | (In thousands, except |        
|                                                                               |  | per share amounts)    |        
|Net income(loss) as reported                                                   |  | $                     | (14,144 | ) |      | $ | (1,449 | )    |  | $ | 3,630 | 
|Stock based compensation recorded in net income (loss)                         |  |                       |        |   |      |   |       |      |  |   |      | 
|Stock based compensation measured using the fair value method
    (net of tax) |  |                       | 3,272   |   |      |   | 2,156  |      |  |   | 2,350 | 
|                                                                               |  |                       |         |   |      |   |        |      | 
|Net income (loss) pro forma                                                    |  | $                     | (17,416 | ) |      | $ | (3,605 | )    |  | $ | 1,280 | 
|                                                                               |  |                       |         |   |      |   |        |      | 
|Basic earnings (loss) per share pro forma                                      |  | $                     | (0.65   | ) |      | $ | (0.13  | )    |  | $ | 0.05  | 
|                                                                               |  |                       |         |   |      |   |        |      | 
|Diluted earnings (loss) per share pro forma                                    |  | $                     | (0.65   | ) |      | $ | (0.13  | )    |  | $ | 0.05  | 
|                                                                               |  |                       |         |   |      |   |        |      | 



|                                                                                            |  |                          |             |  |      |  |             |      |  |  |             | 
|------------------------------------------------------------------------------------------- |  | ------------------------ | ----------- |  | ---- |  | ----------- | ---- |  |  | ----------- | 
|                                                                                            |  | Years Ended December 31, |            
|                                                                                            |  |                          |            
|                                                                                            |  | 2004                     |             |  | 2003 |  |             | 2002 | 
|                                                                                            |  |                          |             |  |      |  |             |      | 
|Risk-free interest rate                                                                     |  |                          | 1.9% - 3.4% |  |      |  | 2.9% - 4.7% |      |  |  | 2.9% - 4.7% | 
|Expected life of options grants                                                             |  |                          | 1 - 5 years |  |      |  | 1 - 5 years |      |  |  | 1 - 5 years | 
|Expected volatility of underlying stock                                                     |  |                          | 82%         |  |      |  | 86%         |      |  |  | 90%         | 
|Expected dividend payment rate, as a percentage of the stock
    price on the date of grant |  |                          |            |  |      |  |            |      |  |  |            | 

F-14



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Comprehensive Income


|                              |                       |      |         |      |      |   |        |      |  |   |       |   | 
|----------------------------- | --------------------- | ---- | ------- | ---- | ---- | - | ------ | ---- |  | - | ----- | - | 
|                              |                       | 2004 |         |      | 2003 |   |        | 2002 | 
|                              |                       |      |         |      |      |   |        |      | 
|Net income (loss) as reported |                       | $    | (14,144 | )    |      | $ | (1,449 | )    |  | $ | 3,630 |  
|Other comprehensive income:   |                       |      |         |      |      |   |        |      |  |   |       |  
|                              | Foreign currency loss |      |         | (184 | )    |   |        |     |  |   |       |  | 
|                              |                       |      |         |      |      |   |        |      | 
|Comprehensive income (loss)   |                       | $    | (14,328 | )    |      | $ | (1,449 | )    |  | $ | 3,630 |  
|                              |                       |      |         |      |      |   |        |      | 



| |                                   
| | ----------------------------------
| | Recent Accounting Pronouncements 





|   |                                                                        
|-- | -----------------------------------------------------------------------
|3. | Disclosures About Segments of an Enterprise and Related
    Information



tm tm




F-15



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                              |  |     |        |         |            |   |        |     |         |           |              |            |  |          |             |   |       |              |         |       |  |   |         |      |  |   |         |  
|----------------------------- |  | --- | ------ | ------- | ---------- | - | ------ | --- | ------- | --------- | ------------ | ---------- |  | -------- | ----------- | - | ----- | ------------ | ------- | ----- |  | - | ------- | ---- |  | - | ------- | -
|                              |  |     |        |         |            |   |        |     |         | Sub-total |              |            |  |          |            
|                              |  |     |        | Payment |            |   |        |     | Instant |           |              | Reportable |  |          | Reconciling |   |       | Consolidated |        
|December 31, 2004             |  | TDS |        |         | Processing |   |        | INS |         |           | Conferencing |            |  | Segments |             |   | Items |              |         | Total | 
|                              |  |     |        |         |            |   |        |     |         |           |              |            |  |          |             |   |       |              |         |       | 
|Revenues                      |  | $   | 88,297 |         |            | $ | 26,836 |     |         | $         | 17,540       |            |  | $        | 382         |   |       | $            | 133,055 |       |  | $ |        |      |  | $ | 133,055 |  
|Gross profit (loss)           |  |     | 37,020 |         |            |   | 19,580 |     |         |           | 8,790        |            |  |          | (225        | ) |       |              | 65,165  |       |  |   |        |      |  |   | 65,165  |  
|Operating income (loss)       |  |     | 16,188 |         |            |   | 3,560  |     |         |           | (4,014       | )          |  |          | (4,309      | ) |       |              | 11,425  |       |  |   | (18,403 | )(1) |  |   | (6,978  | )
|Depreciation and amortization |  |     | 5,760  |         |            |   | 3,086  |     |         |           | 631          |            |  |          | 555         |   |       |              | 10,032  |       |  |   | 877     | (2)  |  |   | 10,909  |  

|                              |  |     |        |         |            |   |     |         |  |              |            |   |          |             |        |       |              |   |         |  |  |   |         |      |  |   |         |  
|----------------------------- |  | --- | ------ | ------- | ---------- | - | --- | ------- |  | ------------ | ---------- | - | -------- | ----------- | ------ | ----- | ------------ | - | ------- |  |  | - | ------- | ---- |  | - | ------- | -
|                              |  |     |        |         |            |   |     |         |  | Sub-total    |            |   |          |             |       
|                              |  |     |        | Payment |            |   |     | Instant |  |              | Reportable |   |          | Reconciling |        |       | Consolidated |  
|December 31, 2003             |  | TDS |        |         | Processing |   | INS |         |  | Conferencing |            |   | Segments |             |        | Items |              |   | Total   | 
|                              |  |     |        |         |            |   |     |         |  |              |            |   |          |             |        |       |              |   |         | 
|Revenues                      |  | $   | 99,023 |         |            | $ |    |         |  | $            | 20,955     |   |          | $           |       |       |              | $ | 119,978 |  |  | $ |        |      |  | $ | 119,978 |  
|Gross profit (loss)           |  |     | 46,399 |         |            |   |    |         |  |              | 11,630     |   |          |             |       |       |              |   | 58,029  |  |  |   |        |      |  |   | 58,029  |  
|Operating income (loss)       |  |     | 22,025 |         |            |   |    |         |  |              | (2,541     | ) |          |             | (3,536 | )     |              |   | 15,948  |  |  |   | (19,806 | )(1) |  |   | (3,858  | )
|Depreciation and amortization |  |     | 7,918  |         |            |   |    |         |  |              | 1,255      |   |          |             | 536    |       |              |   | 9,709   |  |  |   | 689     | (2)  |  |   | 10,398  |  

|                              |  |     |         |         |            |   |     |         |  |              |            |   |          |             |        |       |              |   |         |  |  |   |         |      |  |   |         | 
|----------------------------- |  | --- | ------- | ------- | ---------- | - | --- | ------- |  | ------------ | ---------- | - | -------- | ----------- | ------ | ----- | ------------ | - | ------- |  |  | - | ------- | ---- |  | - | ------- | 
|                              |  |     |         |         |            |   |     |         |  | Sub-total    |            |   |          |             |       
|                              |  |     |         | Payment |            |   |     | Instant |  |              | Reportable |   |          | Reconciling |        |       | Consolidated |  
|December 31, 2002             |  | TDS |         |         | Processing |   | INS |         |  | Conferencing |            |   | Segments |             |        | Items |              |   | Total   | 
|                              |  |     |         |         |            |   |     |         |  |              |            |   |          |             |        |       |              |   |         | 
|Revenues                      |  | $   | 107,121 |         |            | $ |    |         |  | $            | 26,045     |   |          | $           | 272    |       |              | $ | 133,438 |  |  | $ |        |      |  | $ | 133,438 | 
|Gross profit (loss)           |  |     | 51,251  |         |            |   |    |         |  |              | 15,972     |   |          |             | 272    |       |              |   | 67,495  |  |  |   |        |      |  |   | 67,495  | 
|Operating income (loss)       |  |     | 25,749  |         |            |   |    |         |  |              | (1,986     | ) |          |             | (4,711 | )     |              |   | 19,052  |  |  |   | (17,500 | )(1) |  |   | 1,552   | 
|Depreciation and amortization |  |     | 11,327  |         |            |   |    |         |  |              | 2,761      |   |          |             | 407    |       |              |   | 14,495  |  |  |   | 831     | (2)  |  |   | 15,326  | 






|    |                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------
|(1) | Reconciling items from segment operating income (loss) to
    consolidated operating income (loss) include the following:

|                                                                                         |  |      |        |   |      |   |        |      |  |   |        | 
|---------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | 
|                                                                                         |  | 2004 |        |   | 2003 |   |        | 2002 | 
|                                                                                         |  |      |        |   |      |   |        |      | 
|Restructuring costs                                                                      |  | $    | 4,346  |   |      | $ | 5,079  |      |  | $ | 3,616  | 
|Gain on sale of Fraud Centurion assets                                                   |  |      | (2,673 | ) |      |   |       |      |  |   |       | 
|Impairment of intangible assets                                                          |  |      | 2,263  |   |      |   |       |      |  |   |       | 
|Unallocated corporate and centralized marketing, general and
    administrative expenses |  |      | 14,467 |   |      |   | 14,727 |      |  |   | 13,884 | 
|                                                                                         |  |      |        |   |      |   |        |      | 
|Total                                                                                    |  | $    | 18,403 |   |      | $ | 19,806 |      |  | $ | 17,500 | 
|                                                                                         |  |      |        |   |      |   |        |      | 



|    |                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Represent depreciation and amortization included in the
    unallocated corporate or centralized marketing, general and
    administrative expenses.

F-16



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |           
|-- | ----------
|4. | Investment





|   |                       
|-- | ----------------------
|5. | Property and Equipment



|                                               |  |      |         |   |      |   |         |  
|---------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                               |  | 2004 |         |   | 2003 |  
|                                               |  |      |         |   |      |  
|Furniture and fixtures                         |  | $    | 3,593   |   |      | $ | 2,430   |  
|Leasehold improvements                         |  |      | 10,558  |   |      |   | 8,209   |  
|Computer equipment                             |  |      | 19,688  |   |      |   | 23,411  |  
|Computer software                              |  |      | 9,464   |   |      |   | 11,262  |  
|                                               |  |      |         |   |      |  
|                                               |  |      | 43,303  |   |      |   | 45,312  |  
|Less accumulated depreciation and amortization |  |      | (26,325 | ) |      |   | (35,904 | )
|                                               |  |      |         |   |      |  
|Property and equipment, net                    |  | $    | 16,978  |   |      | $ | 9,408   |  
|                                               |  |      |         |   |      |  





|   |                  
|-- | -----------------
|6. | Letters of Credit







|   |                    
|-- | -------------------
|7. | Restructuring Costs



F-17



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                            |  |              |   |                |  |   |          |              |  |      |     |  |  |   |       | 
|------------------------------------------- |  | ------------ | - | -------------- |  | - | -------- | ------------ |  | ---- | --- |  |  | - | ----- | 
|                                            |  | Balance at   |   |                |  |   |          | Balance at   | 
|                                            |  | December 31, |   |                |  |   |          | December 31, | 
|                                            |  | 2003         |   | Accrued        |  |   | Utilized |              |  | 2004 |    
|                                            |  |              |   |                |  |   |          |              |  |      |    
|                                            |  |              |   | (In thousands) |  |   |         
|Employee severance and termination benefits |  | $            |  |                |  | $ | 1,410    |              |  | $    | 46  |  |  | $ | 1,364 | 
|Facility closing and related costs          |  |              |  |                |  |   | 178      |              |  |      | 178 |  |  |   |      | 
|                                            |  |              |   |                |  |   |          |              |  |      |     | 
|Total                                       |  | $            |  |                |  | $ | 1,588    |              |  | $    | 224 |  |  | $ | 1,364 | 
|                                            |  |              |   |                |  |   |          |              |  |      |     | 





|                                            |  |              |   |                |  |   |          |              |  |      |     |  |  |   |    | 
|------------------------------------------- |  | ------------ | - | -------------- |  | - | -------- | ------------ |  | ---- | --- |  |  | - | -- | 
|                                            |  | Balance at   |   |                |  |   |          | Balance at   | 
|                                            |  | December 31, |   |                |  |   |          | December 31, | 
|                                            |  | 2003         |   | Accrued        |  |   | Utilized |              |  | 2004 |    
|                                            |  |              |   |                |  |   |          |              |  |      |    
|                                            |  |              |   | (In thousands) |  |   |         
|Employee severance and termination benefits |  | $            |  |                |  | $ | 172      |              |  | $    | 147 |  |  | $ | 25 | 
|                                            |  |              |   |                |  |   |          |              |  |      |     | 





|                                            |  |              |   |                |  |   |          |              |  |      |       |  |  |   |     | 
|------------------------------------------- |  | ------------ | - | -------------- |  | - | -------- | ------------ |  | ---- | ----- |  |  | - | --- | 
|                                            |  | Balance at   |   |                |  |   |          | Balance at   | 
|                                            |  | December 31, |   |                |  |   |          | December 31, | 
|                                            |  | 2003         |   | Accrued        |  |   | Utilized |              |  | 2004 |      
|                                            |  |              |   |                |  |   |          |              |  |      |      
|                                            |  |              |   | (In thousands) |  |   |         
|Employee severance and termination benefits |  | $            |  |                |  | $ | 2,090    |              |  | $    | 1,255 |  |  | $ | 835 | 
|                                            |  |              |   |                |  |   |          |              |  |      |       | 



F-18



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                            |  |              |   |                |  |   |          |              |  |      |     |  |  |   |   | 
|------------------------------------------- |  | ------------ | - | -------------- |  | - | -------- | ------------ |  | ---- | --- |  |  | - | - | 
|                                            |  | Balance at   |   |                |  |   |          | Balance at   | 
|                                            |  | December 31, |   |                |  |   |          | December 31, | 
|                                            |  | 2003         |   | Accrued        |  |   | Utilized |              |  | 2004 |    
|                                            |  |              |   |                |  |   |          |              |  |      |    
|                                            |  |              |   | (In thousands) |  |   |         
|Employee severance and termination benefits |  | $            |  |                |  | $ | 488      |              |  | $    | 483 |  |  | $ | 5 | 
|                                            |  |              |   |                |  |   |          |              |  |      |     | 





|                                            |  |              |   |         |  |   |          |              |  |      |       |  |         |   |              |          |  |   |      |   |  |   |     |  |  |   |     | 
|------------------------------------------- |  | ------------ | - | ------- |  | - | -------- | ------------ |  | ---- | ----- |  | ------- | - | ------------ | -------- |  | - | ---- | - |  | - | --- |  |  | - | --- | 
|                                            |  | Balance at   |   |         |  |   |          | Balance at   |  |      |       |  |         |   | Balance at   |         
|                                            |  | December 31, |   |         |  |   |          | December 31, |  |      |       |  |         |   | December 31, |         
|                                            |  | 2002         |   | Accrued |  |   | Utilized |              |  | 2003 |       |  | Accrued |   |              | Utilized |  |   | 2004 |  
|                                            |  |              |   |         |  |   |          |              |  |      |       |  |         |   |              |          |  |   |      |  
|Employee severance and termination benefits |  | $            |  |         |  | $ | 1,795    |              |  | $    | 1,542 |  |         | $ | 253          |          |  | $ | (93  | ) |  | $ | 160 |  |  | $ |    | 
|Facility closing and related costs          |  |              |  |         |  |   | 1,743    |              |  |      | 347   |  |         |   | 1,396        |          |  |   | 137  |   |  |   | 665 |  |  |   | 868 | 
|Capital equipment write-offs                |  |              |  |         |  |   | 497      |              |  |      | 497   |  |         |   |             |          |  |   |     |   |  |   |    |  |  |   |    | 
|                                            |  |              |   |         |  |   |          |              |  |      |       |  |         |   |              |          |  |   |      |   | 
|Total                                       |  | $            |  |         |  | $ | 4,035    |              |  | $    | 2,386 |  |         | $ | 1,649        |          |  | $ | 44   |   |  | $ | 825 |  |  | $ | 868 | 
|                                            |  |              |   |         |  |   |          |              |  |      |       |  |         |   |              |          |  |   |      |   | 





|                                            |  |              |   |         |  |   |          |              |  |      |     |  |         |   |              |          |  |   |      |   |  |   |     |  |  |   |   | 
|------------------------------------------- |  | ------------ | - | ------- |  | - | -------- | ------------ |  | ---- | --- |  | ------- | - | ------------ | -------- |  | - | ---- | - |  | - | --- |  |  | - | - | 
|                                            |  | Balance at   |   |         |  |   |          | Balance at   |  |      |     |  |         |   | Balance at   |         
|                                            |  | December 31, |   |         |  |   |          | December 31, |  |      |     |  |         |   | December 31, |         
|                                            |  | 2002         |   | Accrued |  |   | Utilized |              |  | 2003 |     |  | Accrued |   |              | Utilized |  |   | 2004 |  
|                                            |  |              |   |         |  |   |          |              |  |      |     |  |         |   |              |          |  |   |      |  
|Employee severance and termination benefits |  | $            |  |         |  | $ | 77       |              |  | $    | 77  |  |         | $ |             |          |  | $ |     |   |  | $ |    |  |  | $ |  | 
|Facility closing and related costs          |  |              |  |         |  |   | 548      |              |  |      | 185 |  |         |   | 363          |          |  |   | (36  | ) |  |   | 324 |  |  |   | 3 | 
|Capital equipment write-offs                |  |              |  |         |  |   | 378      |              |  |      | 378 |  |         |   |             |          |  |   |     |   |  |   |    |  |  |   |  | 
|                                            |  |              |   |         |  |   |          |              |  |      |     |  |         |   |              |          |  |   |      |   | 
|Total                                       |  | $            |  |         |  | $ | 1,003    |              |  | $    | 640 |  |         | $ | 363          |          |  | $ | (36  | ) |  | $ | 324 |  |  | $ | 3 | 
|                                            |  |              |   |         |  |   |          |              |  |      |     |  |         |   |              |          |  |   |      |   | 

F-19



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                            |  |              |   |         |  |   |          |              |  |      |       |  |         |   |              |          |  |   |      |   |  |              |     |          |  |   |      |  |  |   |   |  |  |   |     |  |  |   |     | 
|------------------------------------------- |  | ------------ | - | ------- |  | - | -------- | ------------ |  | ---- | ----- |  | ------- | - | ------------ | -------- |  | - | ---- | - |  | ------------ | --- | -------- |  | - | ---- |  |  | - | - |  |  | - | --- |  |  | - | --- | 
|                                            |  | Balance at   |   |         |  |   |          | Balance at   |  |      |       |  |         |   | Balance at   |          |  |   |      |   |  | Balance at   |    
|                                            |  | December 31, |   |         |  |   |          | December 31, |  |      |       |  |         |   | December 31, |          |  |   |      |   |  | December 31, |    
|                                            |  | 2001         |   | Accrued |  |   | Utilized |              |  | 2002 |       |  | Accrued |   |              | Utilized |  |   | 2003 |   |  | Accrued      |     | Utilized |  |   | 2004 | 
|                                            |  |              |   |         |  |   |          |              |  |      |       |  |         |   |              |          |  |   |      |   |  |              |     |          |  |   |      | 
|Employee severance and termination benefits |  | $            |  |         |  | $ | 1,580    |              |  | $    | 1,237 |  |         | $ | 343          |          |  | $ | (158 | ) |  | $            | 185 |          |  | $ |     |  |  | $ |  |  |  | $ |    |  |  | $ |    | 
|Facility closing and related costs          |  |              |  |         |  |   | 1,312    |              |  |      | 320   |  |         |   | 992          |          |  |   | 199  |   |  |              | 569 |          |  |   | 622  |  |  |   |  |  |  |   | 339 |  |  |   | 283 | 
|Capital equipment write-offs                |  |              |  |         |  |   | 724      |              |  |      | 724   |  |         |   |             |          |  |   |     |   |  |              |    |          |  |   |     |  |  |   |  |  |  |   |    |  |  |   |    | 
|                                            |  |              |   |         |  |   |          |              |  |      |       |  |         |   |              |          |  |   |      |   |  |              |     |          |  |   |      |  |  |  
|Total                                       |  | $            |  |         |  | $ | 3,616    |              |  | $    | 2,281 |  |         | $ | 1,335        |          |  | $ | 41   |   |  | $            | 754 |          |  | $ | 622  |  |  | $ |  |  |  | $ | 339 |  |  | $ | 283 | 
|                                            |  |              |   |         |  |   |          |              |  |      |       |  |         |   |              |          |  |   |      |   |  |              |     |          |  |   |      |  |  |  



|   |                              
|-- | -----------------------------
|8. | Commitments and Contingencies







F-20



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Leases




|                             |  |           |        | 
|---------------------------- |  | --------- | ------ | 
|                             |  | Operating |       
|                             |  | Leases    |       
|                             |  |           |       
|2005                         |  | $         | 4,840  | 
|2006                         |  |           | 3,820  | 
|2007                         |  |           | 3,013  | 
|2008                         |  |           | 2,758  | 
|2009                         |  |           | 2,108  | 
|Thereafter                   |  |           | 3,526  | 
|                             |  |           |       
|Total minimum lease payments |  | $         | 20,065 | 
|                             |  |           |       





Warranties and Indemnities




F-21



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Litigation Net MoneyIN, Inc. v. VeriSign, Inc., et al




|   |                                                                 
|-- | ----------------------------------------------------------------
|9. | Common Stock Option Plans, Warrants, Stockholder Rights
    Plan



| |                   
| | ------------------
| | Stock Option Plans

1990 Incentive and Nonqualified Stock Option
Plan


1996 Employee Stock Plans




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 1996 Incentive and Nonqualified Stock Option Plan 
    The 1996 Incentive and Nonqualified Stock Option Plan (the 1996
    Plan) provided for the issuance of options to purchase up to
    4,350,000 shares of the Companys common stock.
    Options could be either qualified incentive stock options or
    nonqualified stock options at the discretion of the Board.
    Exercise prices must be greater than or equal to the fair market
    value on the date of grant, in the case of incentive stock
    options and nonqualified options.
|
| |  | 1996 Employee Stock Purchase Plan  The 1996 Employee
    Stock Purchase Plan provides for the sale of up to
    600,000 shares of the Companys common stock to
    employees. Employees are allowed to purchase shares at a
    discount from the lower of fair value at the beginning or end of
    the purchase periods through payroll deductions. At
    December 31, 2004, 194,624 shares were available for
    purchase and reserved for issuance under the 1996 Employee Stock
    Purchase Plan.                                           

1997 Stock Incentive Plan and Restricted Stock Purchase
Plan


1998 Non-Statutory Stock Option Plan


F-22



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




2004 Stock Incentive Plan




|                                 |           |                |       |           |          |           |          |         |  |  |   |      | 
|-------------------------------- | --------- | -------------- | ----- | --------- | -------- | --------- | -------- | ------- |  |  | - | ---- | 
|                                 |           |                |       |           |          | Weighted- |         
|                                 |           |                |       |           |          | Average   |         
|                                 |           |                |       | Weighted- |          |           | Fair     |        
|                                 |           |                |       | Average   |          |           | Value of |        
|                                 |           | Number of      |       |           | Exercise |           |          | Options | 
|                                 |           | Options        |       |           | Price    |           |          | Granted | 
|                                 |           |                |       |           |          |           |          |         | 
|                                 |           | (In thousands) |       |           |          |           |         
|Outstanding at January 1, 2002   |           |                | 4,645 |           |          | $         | 13.17    |         |  |  |   |     
|                                 | Granted   |                |       | 1,260     |          |           |          | 9.44    |  |  | $ | 5.56 | 
|                                 | Exercised |                |       | (394      | )        |           |          | 5.39    |  |  |   |      | 
|                                 | Forfeited |                |       | (1,605    | )        |           |          | 16.34   |  |  |   |      | 
|                                 |           |                |       |           |          |           |          |         | 
|Outstanding at December 31, 2002 |           |                | 3,906 |           |          |           | 11.41    |         |  |  |   |     
|                                 | Granted   |                |       | 393       |          |           |          | 7.27    |  |  | $ | 3.86 | 
|                                 | Exercised |                |       | (163      | )        |           |          | 6.11    |  |  |   |      | 
|                                 | Forfeited |                |       | (807      | )        |           |          | 16.46   |  |  |   |      | 
|                                 |           |                |       |           |          |           |          |         | 
|Outstanding at December 31, 2003 |           |                | 3,329 |           |          |           | 10.12    |         |  |  |   |     
|                                 | Granted   |                |       | 2,905     |          |           |          | 5.71    |  |  | $ | 3.12 | 
|                                 | Exercised |                |       | (220      | )        |           |          | 0.68    |  |  |   |      | 
|                                 | Forfeited |                |       | (1,331    | )        |           |          | 9.15    |  |  |   |      | 
|                                 |           |                |       |           |          |           |          |         | 
|Outstanding at December 31, 2004 |           |                | 4,683 |           |          | $         | 8.00     |         |  |  |   |     
|                                 |           |                |       |           |          |           |          |         | 



|                  |  |                |       |           |          |   |       | 
|----------------- |  | -------------- | ----- | --------- | -------- | - | ----- | 
|                  |  |                |       | Weighted- |         
|                  |  |                |       | Average   |         
|                  |  | Options        |       |           | Exercise |  
|                  |  | Exercisable    |       |           | Price    |  
|                  |  |                |       |           |          |  
|                  |  | (In thousands) |       |           |         
|December 31, 2002 |  |                | 2,278 |           |          | $ | 11.76 | 
|December 31, 2003 |  |                | 2,335 |           |          | $ | 10.12 | 
|December 31, 2004 |  |                | 2,502 |           |          | $ | 10.05 | 

F-23



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|               |       |  |                   |        |                 |             |         |          |           |             |          |          |           |  |             |  |     |  |  |   |       | 
|-------------- | ----- |  | ----------------- | ------ | --------------- | ----------- | ------- | -------- | --------- | ----------- | -------- | -------- | --------- |  | ----------- |  | --- |  |  | - | ----- | 
|               |       |  |                   |        |                 |             |         | Weighted |           |             | Weighted |         
|               |       |  |                   |        |                 |             |         | Average  |           |             | Average  |         
|               |       |  |                   |        |                 | Weighted    |         |          | Remaining |             |          | Exercise |          
|               |       |  |                   | Number |                 |             | Average |          |           | Contractual |          |          | Price for | 
|Number of      |       |  | Range of Exercise |        |                 | Currently   |         |          | Exercise  |             |          | Life     |           |  | Currently   | 
|Options        |       |  | Prices            |        |                 | Exercisable |         |          | Price     |             |          | (Years)  |           |  | Exercisable | 
|               |       |  |                   |        |                 |             |         |          |           |             |          |          |           |  |             | 
|(In thousands) |       |  |                   |        | (In thousands)  |             |         |          |           |             |          |         
|               | 369   |  |                   |        | $ 0.46  $ 4.44 |             |         |          | 52        |             |          | $        | 3.85      |  |             |  | 8.5 |  |  | $ | 3.52  | 
|               | 889   |  |                   |        | 4.67            |             |         |          | 137       |             |          |          | 4.67      |  |             |  | 9.7 |  |  |   | 4.67  | 
|               | 659   |  |                   |        | 4.69    5.90   |             |         |          | 120       |             |          |          | 5.56      |  |             |  | 9.2 |  |  |   | 5.45  | 
|               | 482   |  |                   |        | 6.02    7.63   |             |         |          | 258       |             |          |          | 6.63      |  |             |  | 8.1 |  |  |   | 6.67  | 
|               | 541   |  |                   |        | 7.69    7.94   |             |         |          | 375       |             |          |          | 7.76      |  |             |  | 8.7 |  |  |   | 7.79  | 
|               | 421   |  |                   |        | 8.04    9.92   |             |         |          | 302       |             |          |          | 9.03      |  |             |  | 6.1 |  |  |   | 8.99  | 
|               | 279   |  |                   |        | 10.06   10.91  |             |         |          | 228       |             |          |          | 10.77     |  |             |  | 6.6 |  |  |   | 10.78 | 
|               | 558   |  |                   |        | 11.25   12.13  |             |         |          | 553       |             |          |          | 11.93     |  |             |  | 5.1 |  |  |   | 11.93 | 
|               | 226   |  |                   |        | 12.49   12.88  |             |         |          | 226       |             |          |          | 12.57     |  |             |  | 6.1 |  |  |   | 12.57 | 
|               | 180   |  |                   |        | 12.90   18.31  |             |         |          | 174       |             |          |          | 15.30     |  |             |  | 5.7 |  |  |   | 15.34 | 
|               | 80    |  |                   |        | 19.00   42.97  |             |         |          | 77        |             |          |          | 23.98     |  |             |  | 5.3 |  |  |   | 23.56 | 
|               |       |  |                   |        |                 |             |         |          |           |             |          |          |           |  |             | 
|               | 4,683 |  |                   |        |                 |             |         |          | 2,502     |             |          | $        | 8.00      |  |             |  |     |  |  | $ | 10.05 | 
|               |       |  |                   |        |                 |             |         |          |           |             |          |          |           |  |             | 

Stock Repurchases




|                                      |  |              |         |  |               |                 |      |                     |                |  |                    |  |  |  |           | 
|------------------------------------- |  | ------------ | ------- |  | ------------- | --------------- | ---- | ------------------- | -------------- |  | ------------------ |  |  |  | --------- | 
|                                      |  |              |         |  |               | Total Number of |      |                     | Maximum Number | 
|                                      |  | Total Number |         |  | Average Price |                 |      | Shares Purchased as |                |  | of Shares that May | 
|                                      |  | of Shares    |         |  | Paid per      |                 |      | Part of Publicly    |                |  | yet be Purchased   | 
|Period                                |  | Purchased    |         |  | Share         |                 |      | Announced Plan      |                |  | under the Plan     | 
|                                      |  |              |         |  |               |                 |      |                     |                |  |                    | 
|January 1, 2004 to January 31, 2004   |  |              |        |  |               |                 |     |                     |                |  |                   |  |  |  | 2,087,462 | 
|February 1, 2004 to February 29, 2004 |  |              |        |  |               |                 |     |                     |                |  |                   |  |  |  | 2,087,462 | 
|March 1, 2004 to March 31, 2004       |  |              | 114,600 |  |               | $               | 6.69 |                     |                |  | 114,600            |  |  |  | 1,972,862 | 
|April 1, 2004 to April 30, 2004       |  |              |        |  |               |                 |     |                     |                |  |                   |  |  |  | 1,972,862 | 
|May 1, 2004 to May 31, 2004           |  |              | 520,000 |  |               | $               | 5.83 |                     |                |  | 520,000            |  |  |  | 1,452,862 | 
|June 1, 2004 to December 31, 2004     |  |              |        |  |               |                 |     |                     |                |  |                   |  |  |  | 1,452,862 | 
|                                      |  |              |         |  |               |                 |      |                     |                |  |                    | 
|Total                                 |  |              | 634,600 |  |               | $               | 5.99 |                     |                |  | 634,600            |  |  |  |           | 
|                                      |  |              |         |  |               |                 |      |                     |                |  |                    | 

F-24



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Common Stock Warrants


Stockholder Rights Plan




|    |             
|--- | ------------
|10. | Income Taxes



|                               |         |      |       |       |      |   |        |        |   |   |      |        |  
|------------------------------ | ------- | ---- | ----- | ----- | ---- | - | ------ | ------ | - | - | ---- | ------ | -
|                               |         | 2004 |       |       | 2003 |   |        | 2002   |  
|                               |         |      |       |       |      |   |        |        |  
|Current:                       |         |      |       |       |      |   |        |        |   |   |      |       
|                               | Federal |      | $     | (777  | )    |   | $      | (83    | ) |   | $    | (1,933 | )
|                               | Foreign |      |       | 1,562 |      |   |        |       |   |   |      |       |  
|                               | State   |      |       | (254  | )    |   |        | 76     |   |   |      | 98     |  
|Deferred:                      |         |      |       |       |      |   |        |        |   |   |      |       
|                               | Federal |      |       | 6,806 |      |   |        | (1,053 | ) |   |      | 1,697  |  
|                               | State   |      |       | 1,014 |      |   |        | (42    | ) |   |      | 35     |  
|                               |         |      |       |       |      |   |        |        |  
|Income tax provision (benefit) |         | $    | 8,351 |       |      | $ | (1,102 | )      |   | $ | (103 | )     
|                               |         |      |       |       |      |   |        |        |  

F-25



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                 |                                   |      |   |         |      |  |   |         |   |  |   |         |  
|---------------- | --------------------------------- | ---- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                 |                                   | 2004 |   |         | 2003 |  |   | 2002    |  
|                 |                                   |      |   |         |      |  |   |         |  
|Current Items:   |                                   |      |   |         |      |  |   |         |   |  |   |        
|Assets:          |                                   |      |   |         |      |  |   |         |   |  |   |        
|                 | Allowance for doubtful accounts   |      | $ | 786     |      |  | $ | 1,024   |   |  | $ | 1,182   |  
|                 | Capital loss carryforwards        |      |   | 192     |      |  |   |        |   |  |   |        |  
|                 | Accrued expenses                  |      |   | 1,482   |      |  |   | 1,178   |   |  |   | 1,327   |  
|                 | Restructuring reserve             |      |   | 1,353   |      |  |   | 1,065   |   |  |   | 503     |  
|                 | Less valuation allowance          |      |   | (3,813  | )    |  |   |        |   |  |   |        |  
|                 |                                   |      |   |         |      |  |   |         |  
|                 | Net current deferred tax assets   |      | $ |        |      |  | $ | 3,267   |   |  | $ | 3,012   |  
|                 |                                   |      |   |         |      |  |   |         |  
|Long-Term Items: |                                   |      |   |         |      |  |   |         |   |  |   |        
|Assets:          |                                   |      |   |         |      |  |   |         |   |  |   |        
|                 | Depreciation and amortization     |      | $ | 2,753   |      |  | $ | 1,894   |   |  | $ | 1,218   |  
|                 | Acquisition costs                 |      |   | 357     |      |  |   | 649     |   |  |   | 942     |  
|                 | Intangible assets                 |      |   | 325     |      |  |   | 625     |   |  |   | 1,461   |  
|                 | Loss carryforwards                |      |   | 9,934   |      |  |   | 11,676  |   |  |   | 10,383  |  
|                 | Foreign tax credit carry-forward  |      |   | 1,822   |      |  |   |        |   |  |   |        |  
|                 | R&D tax credit carry-forward      |      |   | 5,699   |      |  |   | 1,840   |   |  |   |        |  
|                 | Valuation allowance               |      |   | (20,890 | )    |  |   | (12,131 | ) |  |   | (10,291 | )
|                 |                                   |      |   |         |      |  |   |         |  
|                 | Net long-term deferred tax assets |      | $ |        |      |  | $ | 4,553   |   |  | $ | 3,713   |  
|                 |                                   |      |   |         |      |  |   |         |  







F-26



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                        |  |      |      |    |      |  |     |      |  |  |     |   
|------------------------------------------------------- |  | ---- | ---- | -- | ---- |  | --- | ---- |  |  | --- | --
|                                                        |  | 2004 |      |    | 2003 |  |     | 2002 | 
|                                                        |  |      |      |    |      |  |     |      | 
|Statutory federal income tax rate                       |  |      | 34   | %  |      |  | 34  | %    |  |  | 34  | % 
|State taxes, net of federal benefit                     |  |      | (1   | )  |      |  | (1  | )    |  |  | 2   |   
|Foreign taxes                                           |  |      | (27  | )  |      |  |    |      |  |  |    |   
|Foreign tax credits                                     |  |      | 31   |    |      |  |    |      |  |  |    |   
|Change in valuation allowance                           |  |      | (217 | )  |      |  | 72  |      |  |  | (14 | ) 
|Research & development credits                          |  |      | (52  | )  |      |  | (62 | )    |  |  | (23 | ) 
|Change in tax exposure reserves                         |  |      | 16   |    |      |  |    |      |  |  |    |   
|Effect of liquidation of a subsidiary on tax attributes |  |      | 69   |    |      |  |    |      |  |  |    |   
|Other, net                                              |  |      | 3    |    |      |  | (1  | )    |  |  | (2  | ) 
|                                                        |  |      |      |    |      |  |     |      | 
|Effective tax rate                                      |  |      | (144 | )% |      |  | 42  | %    |  |  | (3  | )%
|                                                        |  |      |      |    |      |  |     |      | 





|    |                
|--- | ---------------
|11. | Retirement Plan





|    |                         
|--- | ------------------------
|12. | Earnings Per Share (EPS)



F-27



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                             |  |      |        |  |      |  |        |      |  |  |        | 
|-------------------------------------------- |  | ---- | ------ |  | ---- |  | ------ | ---- |  |  | ------ | 
|                                             |  | 2004 |        |  | 2003 |  |        | 2002 | 
|                                             |  |      |        |  |      |  |        |      | 
|Shares for basic computation                 |  |      | 26,643 |  |      |  | 27,015 |      |  |  | 28,030 | 
|Options and warrants (treasury stock method) |  |      |       |  |      |  |       |      |  |  | 403    | 
|                                             |  |      |        |  |      |  |        |      | 
|Shares for diluted computation               |  |      | 26,643 |  |      |  | 27,015 |      |  |  | 28,433 | 
|                                             |  |      |        |  |      |  |        |      | 





13.     Worldcom, Inc. Settlement






|    |                  
|--- | -----------------
|14. | Subsequent Events





F-28



---



##### Table of Contents



LIGHTBRIDGE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                     
|--- | ------------------------------------
|15. | Quarterly Financial Data (Unaudited)

|                                            |  |                                          |        |   |    |   |        |    |  |   |        |   |  |   |        |  
|------------------------------------------- |  | ---------------------------------------- | ------ | - | -- | - | ------ | -- |  | - | ------ | - |  | - | ------ | -
|                                            |  | Q1                                       |        |   | Q2 |   |        | Q3 |  |   | Q4     |  
|                                            |  |                                          |        |   |    |   |        |    |  |   |        |  
|                                            |  | (In thousands, except per share amounts) |       
|2004                                        |  |                                          |        |   |    |   |        |    |  |   |        |   |  |   |        |  
|Revenues                                    |  | $                                        | 29,625 |   |    | $ | 36,685 |    |  | $ | 34,273 |   |  | $ | 32,472 |  
|Gross profit                                |  | $                                        | 13,559 |   |    | $ | 19,201 |    |  | $ | 16,814 |   |  | $ | 15,591 |  
|Income (loss) from operations               |  | $                                        | (1,863 | ) |    | $ | 827    |    |  | $ | (3,975 | ) |  | $ | (1,967 | )
|Net income (loss)                           |  | $                                        | (741   | ) |    | $ | 573    |    |  | $ | (4,300 | ) |  | $ | (9,676 | )
|Basic and diluted earnings (loss) per share |  | $                                        | (0.03  | ) |    | $ | 0.02   |    |  | $ | (0.16  | ) |  | $ | (0.37  | )
|2003                                        |  |                                          |        |   |    |   |        |    |  |   |        |   |  |   |        |  
|Revenues                                    |  | $                                        | 28,423 |   |    | $ | 31,299 |    |  | $ | 29,566 |   |  | $ | 30,690 |  
|Gross profit                                |  | $                                        | 13,591 |   |    | $ | 15,953 |    |  | $ | 14,152 |   |  | $ | 14,333 |  
|Income (loss) from operations               |  | $                                        | (916   | ) |    | $ | (493   | )  |  | $ | (2,743 | ) |  | $ | 294    |  
|Net income (loss)                           |  | $                                        | (357   | ) |    | $ | (83    | )  |  | $ | (1,893 | ) |  | $ | 884    |  
|Basic and diluted earnings (loss) per share |  | $                                        | (0.01  | ) |    | $ | (0.00  | )  |  | $ | (0.07  | ) |  | $ | 0.03   |  



F-29