UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2007



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

For the transition period from ____________ to ____________





Commission File Number 000-26477

CYBERSOURCE CORPORATION

(Exact Name of Registrant as Specified in its Charter)



|                                                                        |  |                                                   
|----------------------------------------------------------------------- |  | --------------------------------------------------
|Delaware (State or Other Jurisdiction of Incorporation or Organization) |  | 77-0472961 (I.R.S. Employer Identification Number)

1295 Charleston Road

Mountain View, California 94043

(650) 965-6000

(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)





Securities Registered Pursuant to Section 12(b) of the Act:

Common
Stock, $.001 Par Value per Share

Securities Registered Pursuant to Section 12(g) of the Act:

None





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933, as amended.     ̈ Yes    x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Securities Act of 1934, as amended.     ̈ Yes    x No

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

Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.    x

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



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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act)

 ̈ Yes    x No

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2007 was approximately
$387.2 million (based on a closing sale price of $12.06 per share as reported for the NASDAQ Global Market on June 29, 2007). Shares of Common Stock held by officers and directors have been excluded from this calculation because such persons
may be deemed to be affiliates.

The number of shares of the registrants Common Stock, $.001 par value per share, outstanding as of
February 13, 2008 was 68,827,415.

Documents incorporated by reference: Portions of Part II and Part III of this Form 10-K
incorporates information by reference from the registrants Proxy Statement for its 2008 Annual Meeting of Stockholders.









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CAUTIONARY STATEMENTS

The statements contained in this Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding the Companys expectations, objectives, anticipations, plans, hopes, beliefs, intentions or
strategies regarding the future. Forward-looking statements include, without limitation, statements regarding (a) estimates regarding U.S. eCommerce revenues and the potential growth of online sales, (b) Europes pace of growth,
(c) estimates that online sales of U.S. retailers comprised 3.5% of their total U.S. sales, up from 3.1% in the fourth quarter of 2006, (d) the trend among some of our large U.S. customers seeking greater and more ready access to
international markets, (e) online merchants increasing focus on meeting regulatory requirements in areas such as collection of sales taxes, (f) our goal of providing a single source solution that simplifies and optimizes online
payment, and (g) our belief that Payment Management as becoming more complex; under Item 1, BusinessMarket Characteristics; the statement regarding our belief that a strong emphasis placed on analysis and design early in the
project lifecycle reduces the number and costs of defects that may be found in later stages under the heading Item 1, BusinessProduct Development; the statements regarding (a) our belief that our success depends upon our
proprietary technology and licensed technology and (b) our belief that based upon past experience and industry practice, such licenses generally could be obtained on commercially reasonable terms under the heading Item 1,
BusinessIntellectual Property; the statement regarding our technology, processes, and people enabling us to deliver the highest level of services and performance to our customers under the heading Item 1,
BusinessOperations; the statement regarding our solutions alliances and strategic alliances resulting in cooperative development efforts, streamlining of integration capabilities and leveraged marketing efforts under the heading
Item 1, BusinessSales and Marketing; the statements regarding (a) our expectation that competition in the market for our products and services will intensify in the future, (b) our belief that the market for our solutions
is rapidly evolving and we may not be able to compete successfully against current and future competitors, and (c) our expectation that competitive pressures may result in the reduction of our prices or our market share or both under the
heading Item 1, Business-Competition; the statement regarding our beliefs with respect to our systems and processes enabling us to comply with the Fair Credit Reporting Act if we were deemed a consumer reporting agency under the heading
of Item 1, BusinessRegulations; statements that (a) we expect that our quarterly operating results will fluctuate significantly in the future based upon a number of factors, many of which are not within our control,
(b) we may pursue strategic acquisitions of complementary businesses or technologies that would provide additional product or service offerings, additional industry expertise, a broader client base or an expanded geographic presence,
(c) any future acquisition could result in the use of significant amounts of cash, dilutive issuances of equity securities, or the incurrence of debt or amortization expenses related to goodwill and other intangible assets, any of which would
materially adversely affect our business, operating results and financial condition, (d) that we anticipate that the merger will create opportunities to achieve cost savings and revenue synergies, to share technological developments and to
achieve other synergistic benefits, (e) our expectation that the combined company will benefit from operational synergies resulting from the consolidation of capabilities and elimination of redundancies, as well as greater efficiencies from
increased scale and market integration, (f) our belief that achieving the anticipated benefits of the Authorize.Net merger will depend, in part, on the integration of technology, operations and personnel of the two former companies,
(g) that our success will depend in part upon the ability of our executive officers to manage growth effectively, (h) our expectation that we will incur additional amortization expense based on the identifiable amortizable intangible
assets acquired pursuant to the merger with Authorize.Net, (i) that we currently estimate that we will initially incur approximately $29 million of incremental annual amortization expense, (j) our belief that we will continue to experience
periodic interruptions, affecting all or a portion of our systems, from time to time, (k) that our success also depends on our ability to grow, or scale, our commerce transaction systems to accommodate increases in the volume of traffic on our
systems, especially during peak periods of demand, (l) our belief that our future growth will depend in part on the success of our relationships with existing and future sales alliances that market our products and services to their merchant
accounts, (m) that our success will depend, in part, on our ability to both internally develop and license leading technologies to enhance our existing products and services and develop new products and services, (n) we may be required to
expend significant capital and other resources to protect against security breaches and to address any problems they may cause, (o) to the extent that new regulations make it more difficult or expensive to grant stock options to employees, we
may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business, and (p) our future success will
depend upon our ability to retain our key management personnel under the heading of Item 1A, Risk Factors; statements regarding (a) our belief that any direct financial impact of the proposed settlement is expected to be borne by
our insurers, (b) our belief that presently, the lawsuit would not have a material effect on our financial condition, results of operations, or cash flows, (c) and our belief that the outcome of any of these claims or any of the above
mentioned legal matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows under the heading of Item 3, Legal Proceedings and under Item 7, Managements
Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies; statements regarding our belief that we do not anticipate paying any cash dividends in the foreseeable future under the heading
Item 5, Market for Registrants Common Equity and Related Stockholder Matters;



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statements regarding (a) our intention to maintain the remaining valuation allowance until sufficient further positive evidence exists to support
further reversals of the valuation allowance, (b) that our income tax expense recorded in the future will be reduced to the extent of offsetting decreases in our valuation allowance, (c) our expectation that we will recognize total
unrecognized stock-based compensation expense related to non-vested stock options over a weighted average period of approximately 2.8 years, (d) that we will recognize the stock-based compensation expense ratably over the requisite service
period of the award, (e) our expectation that product development expenses will increase in absolute dollars during 2008, offset to a certain extent by a decrease in expenses related to BidPay (f) our expectation that product development
expenses will moderately decrease as a percentage of revenue during 2008 as compared to 2007 due primarily to expected revenue growth, (g) our expectation that sales and marketing expenses will increase in absolute dollars during 2008 due to
the increased commissions paid to outside sales agents as well as the increased headcount resulting from our acquisition of Authorize.Net, (h) our expectation that sales and marketing expenses in 2008 will moderately decrease as a percentage of
revenues as compared to 2007 due primarily to expected revenue growth, (i) our expectation that general and administrative expenses will increase in absolute dollars in 2008 due primarily to increased headcount resulting from our acquisition of
Authorize.Net, offset to a certain extent by a decrease in expenses related to BidPay (j) our expectation that general and administrative expenses in 2008 will moderately decrease as a percentage of revenues as compared to 2007 due primarily to
expected revenue growth, (k) our expectation that interest income will decrease in 2008 due to anticipated lower average cash and cash equivalents and short-term investment balances, resulting from the acquisition of Authorize.Net as well as
lower expected investment yields, (l) our belief that CyberSource and Authorize. Nets respective businesses complement each other and that the acquisition will increase the scale and scope of the combined company, diversify the combined
companys service offerings, and create opportunities for cost reductions through integration savings, (m) that we expect intangible amortization expense included in cost of revenues to increase significantly during 2008 as the amount
included in 2007 only represents amortization for two months and (n) that we expect intangible amortization expense included in sales and marketing expenses to increase significantly during 2008 as the amount included in 2007 only represents
amortization for two months under the heading Item 7, Managements Discussion and Analysis of Financial Condition and Results of OperationsResults of Operations; the statement regarding our belief that our cash and
short-term investment balances will be sufficient to meet our working capital requirements for at least the next twelve months under the heading Item 7, Managements Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital Resources; the statements regarding (a) our belief that the impact of adopting SFAS 141R will be dependent on the future business combinations that we may pursue after its effective date under the
heading Item 7, Managements Discussion and Analysis of Financial Condition and Results of OperationsRecent Pronouncements; statements regarding (a) our belief that the acquisition will increase the scale and scope of the
combined company, diversifying the combined companys service offerings, and create opportunities for cost reductions through integration savings, (b) our belief that any direct financial impact of the proposed settlement is expected to be
borne by our insurers, (c) the lawsuit with ReD will not have a material effect on our financial condition, results of operations, or cash flows, (d) our belief that there are no claims or actions pending or threatened against us, the
ultimate disposition of which would have a material impact on our financial position or results of operations, and (e) that amount of goodwill that is expected to be tax deductible is approximately $46.3 million under the heading Item 8,
Financial Statements and Supplementary DataNotes to Consolidated Financial Statements; and statements regarding (a) our goal of monitoring our internal controls for financial reporting and making modifications as necessary and
(b) our intent that the internal controls for financial reporting be maintained as dynamic systems that change (including improvements and corrections) as conditions warrant under the heading Item 9A, Controls and ProceduresInternal
Control Over Financial Accounting.

All forward-looking statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Companys actual results could differ materially from those included in such forward looking
statements. Factors that could cause actual results to differ materially from the forward looking statements include risks and uncertainties detailed throughout this Annual Report, and in particular in the Risk Factors section at
the end of Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations. Such factors include but are not limited to the following cautions: (1) We are subject to the risks
encountered by early stage companies, such as risks of intense competition and rapid technological change in our industry, risks that we may not be able to fully utilize relationships with our strategic partners and indirect sales channels, risks
that any fluctuations in our quarterly operating results will be significant relative to our revenues and risks that we may not be able to adequately integrate acquired businesses; (2) We may incur future losses and there is no assurance that
we will realize sufficient revenues to achieve ongoing profitability; (3) Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements; (4) Potential system failures, compromised
security measures or lack of capacity issues could negatively affect demand for our services; (5) Growth in the significance of the Internet as a commercial marketplace may occur more slowly than anticipated; (6) We may not be successful
in attracting and/or retaining key employees in the future, (7) Third parties may claim that the technology employed in providing our current or future products and services infringes upon their rights and (8) Internal control over
financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. These cautionary statements should be considered in the context of such factors, as
well as those disclosed from time to time in the Companys Reports on Forms 10-Q and 8-K.





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PART I

ITEM 1:    BUSINESS

Company Overview

CyberSource Corporation (CyberSource or the Company) is a leading provider of electronic payment and risk management solutions to
organizations that process orders for goods and services over the Internet, which is referred to herein as ePayment Management. We partner with and connect to a large network of payment processors and other payment service providers to offer
merchants a single source solution that simplifies ePayment Management. Our payment solutions allow eCommerce merchants to accept a wide range of online payment options, from credit cards and electronic checks, to global payment options and emerging
payment types. CyberSource also offers industry leading risk management solutions to help online merchants address complexities such as credit card fraud, online tax requirements, and export controls. CyberSource Professional Services help to
design, integrate, and optimize commerce transaction processing systems for merchants. Approximately 228,000 businesses use CyberSource solutions, including half the companies comprising the Dow Jones Industrial Average.

In 2007, we processed approximately 1.2 billion transactions, a 45% increase over 2006. The dollar value of all credit card authorization requests
we processed in 2007 exceeded $54 billion, a 57% increase over 2006.

CyberSource Corporation was founded in 1994 and initially launched as
software.net, an online software store that built payment processing to support its sales. In 1997, the payment processing business was spun-off from software.net to form a separate corporation initially named, Internet Commerce Services
Corporation. Internet Commerce Services Corporation later changed its name to CyberSource Corporation and continues to operate today under that name. Our headquarters is located at 1295 Charleston Road, Mountain View, California 94043, and we
have sales, service, and development offices in Japan, the United Kingdom, and other locations in the United States including Bellevue, Washington, American Fork, Utah and Austin, Texas. We maintain a website at www.cybersource.com. The reference to
this website address does not constitute incorporation by reference of the information contained therein.

On November 1, 2007,
CyberSource completed the acquisition of Authorize.Net Holdings, Inc, a leading provider of payment solutions for small to medium sized businesses. The acquisition joins two highly complementary businesses, positioning CyberSource to further
capitalize on the growing Web-based payment opportunity. The acquisition was a stock and cash transaction valued at approximately $662 million, based on the closing price of CyberSource common stock on October 31, 2007.

The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the Exchange Act). Accordingly, the Company
files periodic reports, proxy statements and other information with the Securities and Exchange Commission (the SEC). Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC
at 450 Fifth Street, NW, Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and the Proxy Statement for our
Annual Meeting of Stockholders are made available, free of charge, on our website, www.cybersource.com, as soon as reasonably practicable after the reports have been filed with or furnished to the SEC.

Market Characteristics

In 2007, Forrester Research
estimated the US online eCommerce market to be $259.1 billion, a ten year compounded annual growth rate (AGR) of 59.7%. According to Forrester Research, eCommerce in Europe has grown over the last ten years at a 38% AGR, to $176.9
billion in 2007. For 2007, the U.S. Census Bureau reported in February 2008 that online sales by U.S. retailers grew by 19.0% over 2006. This compares to a 2007 total retail sales growth of 3.9%. For the fourth quarter of 2007 the U.S. Census
Bureau estimated that online sales of U.S. retailers comprised 3.5% of total U.S. retail sales, up from 3.1% in the fourth quarter of 2006.

As the online eCommerce market continues to grow, selling online has become a strategic business
strategy component for many organizations. Although credit cards have long been the dominant payment method available to online purchasers, alternative consumer payment options and cultural preferences have impacted the global payment environment. A
wide spectrum of payment options, such as debit cards, electronic checks, and online payment innovations such as Bill Me Later® and PayPal® are emerging worldwide. Since 2004, we have experienced a noticeable trend among some of our large U.S. customers seeking greater access into international markets, especially Europe and China. Conducting online
commerce internationally involves supporting more payment types, currency conversions, new payment processors, and mitigating higher fraud risk.

Online fraud has evolved into an organized and systemic threat to online merchants. The latest CyberSource Fraud Survey, sponsored by CyberSource and conducted by Mindwave Research in October 2007, concluded that dollar losses
from



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eCommerce fraud continue to grow diverting approximately $3.6 billion from U.S. eCommerce in 2007, a 19% increase over 2006. According to the survey, the
percent of revenue that merchants say they will lose to fraud remained stable from 2006 to 2007 (1.4% both years), but because eCommerce sales continue to grow, dollar losses to U.S. eCommerce grow proportionately. Merchants are increasing the
number of fraud detection tools they use to manage payment fraud risk.

In June 2005, in the U.S., Visa and MasterCard began requiring
compliance with a comprehensive security requirement called the Payment Card Industry Data Security Standard (PCI) to limit the threat of cardholder information theft. With the challenge of becoming PCI compliant, some merchants are
instead using CyberSource to manage sensitive customer information such as credit card numbers and related transaction data. For merchants that subscribe to Secure Storage or Hosted Payment Acceptance services, CyberSource handles and stores all
payment data on behalf of the merchants in PCI certified processing centers that connect directly with the banking network. CyberSource is evaluated once annually for PCI, and has been verified as compliant for 2007-2008. Additionally, CyberSource
conducts quarterly threat assessment tests and employs rigorous security measures to prevent unauthorized access or security breaches.

Online merchants are also focusing on meeting regulatory requirements in areas such as collection of sales taxes. European Union directives require that all online sellers of digital goods collect the applicable value-added tax for sales in
the European Union.

The impact of these trends is that ePayment Management is becoming more complex. Online merchants must maintain
technical and financial connections with a number of different payment processors and service providers, integrate these disparate connections with a number of internal business systems, allocate manual resources to keep pace with the growth of
online sales, and comply with statutory and card association requirements. CyberSource enables its customers to meet these requirements simply and cost effectively with its ePayment Management solution.

CyberSource Customers

Our customers range in size
from small sole proprietorships to some of the worlds largest corporations and institutions. Our customer base includes leading companies such as Air France, Borders Group, British Airways, Christian Dior, Eastman Kodak, Home Depot, Louis
Vuitton, Massachusetts Institute of Technology, Microsoft, Nike, Starbucks, and Yahoo!, among thousands of others. To properly serve this diverse set of needs, CyberSource divides its potential market into two segments, enterprise and small business
merchants, which require different solutions. Enterprise merchants have high sales volumes and generally demand the greatest range of payment options and the most sophisticated risk and management tools. These customers often sell in multiple
countries and require support for local currencies and local payment options. High volume customers also frequently need to integrate payment processing with one or more internal business systems. CyberSource serves enterprise customers by providing
solutions that address and simplify the breadth of requirements. Smaller business merchants generally seek simplicity and ease of use. CyberSource addresses the needs of small merchants with bundled services and integrations into popular online
shopping cart software, while bringing to the small business market some of the advantages of CyberSources enterprise-level services, including important new payment options such as electronic checks, as well as high-reliability and quality
customer support.

Platform Options

CyberSource solutions are made available to customers through hosted services, enterprise software, or a combination of the two. Merchants that elect to outsource processing to CyberSource use our hosted services. Merchants that prefer to
maintain processing internally and establish connections directly to processors use our enterprise software, called CyberSource Payment Manager. Both platforms are augmented by CyberSource Professional Services, which provides consulting, design,
integration, and optimization services. Key attributes of our hosted services include redundancy of networks and data centers, strict security, and high capacity.

CyberSource Products and Services

CyberSource Payment Solutions

CyberSource Advanced

For the enterprise customer, CyberSource offers a comprehensive set of payment
products and services called CyberSource Advanced. Requirements of these larger merchants typically include acceptance of all major credit and debit cards, the ability to bill customers at regular monthly intervals, support for international payment
options, sophisticated fraud prevention, and tools to automate internal processes to reduce the administrative costs and burdens of accepting online orders.



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CyberSource Advanced enables merchants to accept
payments made by all major credit and debit cards including American Express®, Discover®, Diners Club International®, JCB, MasterCard®, and Visa® cards. CyberSource customers can also accept
payment by corporate procurement cards, electronic checks, PayPal® Express Checkout, and the Bill Me Later® service. Merchants
that have business models based on subscriptions can take advantage of the CyberSource recurring billing service. For merchants selling internationally, CyberSource supports direct debit, and bank transfers, as well as regional card brands such as
Carte Bleue, Carta Si, Dankort, Laser, Solo, and Visa Electron.

Authorize.Net, a CyberSource Solution

Targeted towards small and medium-sized merchants with under $3 million in annual sales,
Authorize.Net enables merchants to authorize, settle, and manage credit card and electronic check payments via Web sites, retail stores, mail order/telephone order (MOTO) call centers and mobile devices. Merchants can accept a variety of
payments including all major credit cards as well as electronic checks. The benefits of using Authorize.Net for small and medium-sized merchants include ease-of-integration and ease-of-use. Electronic checks are processed using Authorize.Nets
eCheck.Net® service, which allows merchants to process electronic check transactions directly from a web site or through the Virtual Terminal. Authorize.Net also certifies numerous
third-party point-of-sale solutions or devices that are integrated to the Authorize.Net payment gateway.

Standard services include credit card processing, Card Code Verification (CCV) and Address Verification Service (AVS), Virtual Terminal, Verified Merchant Seal, Virtual Point of Sale
(VPOS) as well as extensive reporting, and QuickBooks® compatibility. Premium value-adding services include eCheck.Net® electronic check processing service, Automated Recurring Billing service for subscription payments, Fraud Detection Suite service, and secure storage of customers transaction data through the
Customer Information Manager service.

These services are integrated into the Authorize.Net platform, providing merchants with the ability
to easily adapt their payment solution to the merchants needs. The Authorize.Net Merchant Toolbox features partners that provide discounts on marketing, security, business productivity and accounting solutions for merchants. The Authorize.Net
Verified Merchant Seal confirms to consumers that Web sites displaying the seal are verified Authorize.Net merchants.

CyberSource Global Acquiring
(Merchant Account Services)

CyberSource underwrites services that enable merchants to accept card payments within the United States,
as well as accept and process major and regional payment types worldwide. CyberSource interfaces with payment systems on behalf of the merchant to authorize the payment presented by a merchants customer, collect funds from their
customers bank, and deposit the funds into the merchants designated checking account. These services are available as a bundled offering with all CyberSource payment solution packages and software.

CyberSource Payment Manager

CyberSource Payment
Manager is an enterprise software processing platform that operates behind the scenes to authorize and settle payments originating from one or more sales channels. Once installed on the merchants servers, CyberSource Payment Manager receives
transaction requests from the merchants commerce platform, contact center application, point-of-sale or enterprise resource planning system. CyberSource Payment Manager routes those requests to the payment network for authorization, through
the merchants own connections to processors, and returns the results to dependent business systems.

CyberSource Risk & Security
Management Solutions and Other CyberSource Solutions

The CyberSource suite of modular and scalable services is designed to help
merchants address the growing challenge of online fraud. CyberSource solutions can be implemented as a single component or as fully-integrated systems, and can be managed in-house, outsourced, or constructed as a blend of both.

Fraud Detection/Verification Tools

CyberSource
Advanced Fraud Screen enhanced by Visa (AFS), the only risk scoring service endorsed and enhanced by Visa U.S.A, Inc., provides fraud risk prediction scores by assessing over 150 order variables such as domestic and international address
validation, domestic and international IP address verification, device fingerprinting, and order velocity. The results from AFS include a numerical risk score as well as risk profile codes indicating the types of risk detected by the system.

Through a single connection to CyberSource, CyberSource customers can also use card association authentication systems such as Verified by
Visa and MasterCard SecureCode. These card programs verify the cardholders identity directly with the card issuer in real-time to increase security of payment acceptance.



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Rule & Decisioning Systems: CyberSource Decision Manager

We offer a range of decision management systems ranging from hosted solutions that include custom rule and case management capabilities, to locally
managed software that can be customized to the merchants installation. A hosted rules and case management system allows business managers to create screening rules to automatically disposition orders (accept, reject, review). Built-in case
management systems include a portal to over 100 global validation services and tests. Hosted risk services are marketed as CyberSource Decision Manager Standard Edition and CyberSource Decision Manager Advanced Edition. These systems include
interfaces to our risk scoring service as well as other external services and the merchants own data.

Managed Risk Service

This service provides the professional analysis, design, modeling and monitoring services required to optimize transaction conversion, while minimizing
manual review and fraud risk associated with card-not-present transactions. We collaborate with customers to set business metrics, review performance, and provide business tools.

Payment Data Management

Using CyberSources PCI-certified data centers, customers can avoid
storing and handling sensitive payment data. Secure storage and hosted payment acceptance for customers instantly boosts their payment security by moving sensitive payment data off customers systems.

Tax Calculation, Delivery Address Verification, and Export Compliance

Online organizations often require tools to facilitate tax payment and export regulatory compliance. The CyberSource Tax Service calculates sales and use taxes for over 13,000 U.S. Taxing jurisdictions, 44,000 sales,
sellers use, consumers use, and rental rates, and supports value added tax calculation in the U.S., Canada, Latin America, Europe and the Asia Pacific.

We offer Delivery Address Verification (DAV) services to verify the validity of addresses worldwide and comply with the U.S. Postal Services requirements, such as bar code and carrier route
identification. If an address is incorrect and is found to be correctable, DAV will return a corrected address and identify address elements in error. The CyberSource Export Compliance service helps online merchants comply with U.S. Government
export regulations by comparing orders against a changing list of denied countries or persons.

Professional Services

Building upon our experience in eCommerce, we employ a team of experts that can help merchants operate effective online businesses. The CyberSource
Professional Services group provides business and technical consulting services including technology selection, analysis of impacts of the online business on internal processes, devising merchant-specific risk management strategies, systems
installation, integration of CyberSource products and services with the merchants existing internal systems, building custom reporting tools, disaster recovery planning, and security consulting. In April 2005, we introduced the CyberSource PCI
Compliance Service, a comprehensive assessment and readiness program for eCommerce merchants seeking compliance with PCI. As of December 31, 2007, we employed 13 persons in our Professional Services group.

BidPay

BidPay.com, Inc., a wholly owned subsidiary
of CyberSource that processed payments for online auctions, ceased operations effective December 31, 2007. CyberSource incurred a one-time charge of approximately $1.8 million in the fourth quarter of 2007 related to the shutdown. We acquired
BidPay.com from First Data Corporation on March 7, 2006 and the service was re-launched in June 2006.

Technology

Transaction Services

CyberSource operates two
transaction processing platforms, one for enterprise merchants and one for small business customers. They are a modular architecture designed for scalability, reliability, extensibility and performance. These systems are composed of multiple groups
of servers and routers that appear as a single point of contact to our customers systems. Our transaction processing systems manage workflow functions and the required communications between our servers, our database, and our processors,
including American Express, Barclays Bank, Chase Paymentech Solutions, First Data Corporation, Global



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Payment Systems, Streamline International (a division of the Royal Bank of Scotland Group), TSYS Acquiring Solutions and others. These systems also utilize
the latest industry standards to maximize compatibility with our customers commerce systems. In addition, we have implemented a global network of telecommunications access points that are designed to optimize transaction processing response
times and to mitigate the effects of system failures. The primary software components of our two systems are the respective client software, Order Processing APIs, commerce services applications, transaction databases and data warehouses.

Client Software

Our commerce
services are invoked by a common programming interface residing on our customers commerce servers. For our enterprise platform, client software is offered in two protocols, Simple Commerce Messaging Protocol (SCMP) and Order
Processing API, and can be easily installed by customers using pre-built developer kits and application plug-ins. These developer kits are available for most popular programming environments, including ASP/COM, .NET, Java and others, and for most
operating systems, including Windows NT/2000, Linux, and UNIX (Solaris, HP/UX, IBM/AIX and others). Developer kits also come with samples that customers can use to quickly deploy CyberSource services within their enterprises.

Order Processing API using Web Services

For our
enterprise platform, we offer the CyberSource Order Processing API to enable the secure and reliable communication of order data from our customers systems to CyberSource systems. The Order Processing API provides our customers with a way to
send invoice data to CyberSource for processing by any of the CyberSource commerce services applications. Using industry standard web services technologies, including SOAP, XML, and WS Security, the Order Processing API provides customers with an
industry recognized implementation path allowing the Order Processing API to be built into customer order management applications. The Order Processing API uses the Data Encryption Standard, RSA/public key cryptography and digital certificates to
ensure secure signed communication of transaction data. We also developed SCMP to enable efficient and secure connections between our systems and our customers systems. In order to ensure secure messaging, SCMP utilizes industry standards for
secure communications including the Data Encryption Standard, RSA/public key cryptography and digital certificates. SCMP has been designed so that it can be integrated into virtually any commerce server platform.

For our small business platform, there are several methods for connecting web sites, MOTO, and point-of-sale systems to the payment gateway. Web
merchants have the flexibility to choose which connection method best fits their payment acceptance infrastructure. Connection methods are Advanced Integration Method (AIM) and Server Implementation Method (SIM).

AIM is a merchant-initiated server-to-server connection for submitting transactions to the payment gateway. 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 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.

MOTO merchants can submit transactions manually via a secure Web browser using the Virtual Terminal or
Batch Upload tool. Retail merchants can process transactions using the Authorize.Net VPOS.

Additionally, there are approximately 118
third-party certified products, including shopping carts, kiosks, and mobile and software solutions that have integrated their eCommerce solution with the small business payment gateway. These integrated solutions provide merchants with
easy-to-implement checkout page solutions or hardware and software that are already integrated with the payment processing gateway.

Commerce Services
Applications

We have developed and licensed a set of software applications that perform the hosted services. In many cases,
execution of the applications are distributed among the processing systems and database systems, enabling us to minimize interruptions during scheduled maintenance, code pushes, and system modifications.

For our enterprise platform, these services include credit card processing, electronic check processing, order decision management, gift and promotional
certificates, Bill Me Later payment service, payer authentication, PayPal, CyberSource Advanced Fraud Screen enhanced by Visa, tax services, delivery address verification, and export compliance.



6



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For our small business platform, these services include eCheck.Net, Automated Recurring Billing , Fraud
Detection Suite, Customer Information Manager, and Virtual Point of Sale.

Transaction Database Architecture

Two primary sets of databases form the core of our transaction processing system: the transaction processing databases, which maintain information
necessary to process each individual transaction, and the post-transaction database, which generates and provides detailed information about customers transactions, with advanced reporting capabilities available in XML and other formats.

Data Centers and Network Access

Our
data centers are located at facilities in: San Jose, California; Seattle, Washington; Denver, Colorado; Phoenix, Arizona; London, England; and Tokyo, Japan. These secure data center facilities contain our servers, network firewalls, routers and
other technology necessary to provide high availability transaction services and connectivity to the Internet, our customers and processing partners. The data centers provide high-speed and redundant network connectivity, uninterruptible power
systems, fire detection and suppression systems, physical security and surveillance on a 24 hours a day, 7 days a week, 365 days a year basis. In addition, we have access to numerous network points of presence located on five continents from third
party providers, enhancing our ability to serve customers globally. These points of presence, through controlled route announcements to providers such as AboveNet, AT&T, Cable & Wireless, GLBX, Level 3 Communications, Sprint, Telia,
UU-NET and Verio enable us to provide direct, rapid and reliable access to our suite of services.

Industry Standards

The implementation of our architecture for hosted services is based on and complies with widely accepted industry standards. For example, our transaction
processing systems utilize components from industry leaders such as Cisco, Hewlett Packard, IBM, Microsoft, Red Hat, RSA Data Security, Sun Microsystems and Sybase. Adherence to industry standards provides compatibility with existing applications,
ease of modification, and reduces the need for software modules to be rewritten over time, thus protecting our customers investments.

Enterprise Software: CyberSource Payment Manager

The CyberSource Payment Manager product is
based on modular systems architecture that allows this server to be installed into large customer infrastructures where a dedicated payment gateway interface will be used. The CyberSource Payment Manager is designed as a three-layer software
architecture well suited for enterprise deployment. These layers include the multiple sales channel interface, core server, and database. The CyberSource Payment Manager core server supports a common programming interface that can be adapted to
multiple sales channel enterprise systems. These sales systems could be used in conjunction with a call center in order to accept orders through an interactive voice response unit, from a Web server using hypertext transfer protocol, from a
point-of-sale terminal, or from a wireless application protocol device. The database layer is based on a standard structured query language interface, offering a choice of implementations with any of the standard relational database management
systems on the market. Database platforms currently used by our customers include Microsoft SQL Server, Oracle, and Sybase.

Product Development

Our product development team is responsible for the design, development, and release of our software and core infrastructure for
services. We emphasize quality assurance throughout our development lifecycle. We believe that a strong emphasis placed on analysis and design early in the project lifecycle reduces the number and costs of defects that may be found in later stages.

When appropriate, we utilize third parties to expand the capacity and technical expertise of our internal product development
organization. On occasion, we have licensed third-party technology that we feel provides the strongest technical alternative. We believe this approach shortens time-to-market without compromising our competitive position or product quality. As of
December 31, 2007, we employed 112 persons in our product development department.

Intellectual Property

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



7



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We have been issued eight patents and have thirty patent applications pending. The issued patents cover
much of the technology we employ, including fraud detection, cryptography, digital certificates, stored value services, and digital software distribution. We have pending patent applications covering cryptography, order management, digital delivery,
stored value services, fraud detection, and digital delivery. We investigate, define, and prepare applications for new patents as a part of the standard product development cycle. Our product development and legal management teams meet on a regular
basis to harvest new inventions. We cannot assure that any patent application that we file will issue as a patent, and we cannot assure that any patent issued to us will not be held invalid or unenforceable based on prior art or for any other
reason. Some of our technology is designed to include intellectual property obtained from third-parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of its products and business methods, we believe,
based upon past experience and industry practice, that such licenses generally could be obtained on commercially reasonable terms; however, there is no guarantee that such licenses could be obtained at all.

We believe that numerous patent applications relating to the Internet commerce field have been filed or have been issued as patents. From time to time,
in the ordinary course of business, we may become aware of one or more patents of third parties that we choose to evaluate for a variety of purposes. These purposes may include determining the general contents of patents, reviewing the technological
developments of their assignees, and determining whether our technology may overlap. We have not conducted searches to determine whether any of our services or technology could be alleged to infringe upon any patent rights of any third party. We
cannot assure that none of our products, services, and technology infringes any patent of any third party.

As part of our confidentiality
procedures, we generally enter into non-disclosure agreements with our employees, contractors, vendors, potential customers and alliances: and, our license agreements with our customers, with respect to our software, services, documentation and
other proprietary information, contain confidentiality obligations. Despite these precautions, third parties could reverse engineer, copy or otherwise obtain our technology without authorization, or develop similar technology independently. We are
unable to determine the extent to which piracy of our intellectual property or software exists. Software piracy is a prevalent problem in our industry. Effective protection of intellectual property rights may be unavailable or limited in foreign
countries. We cannot assure that the protection of our proprietary rights will be adequate or that our competitors will not independently develop similar technology, duplicate our services, or design around any intellectual property rights we hold.
See the discussion under Item 3 Legal Proceedings for further information regarding infringement of our 154 Patent.

From time to time we may receive notice of claims of infringement of other parties intellectual property rights. As the number of services in our market increases and functionalities overlap, companies such as ours may become
increasingly subject to infringement claims. Any infringement claims, with or without merit, could be time-consuming, result in costly litigation, diversion of technical and management personnel, or require us to develop non-infringing technology or
enter into licensing agreements. Such licensing agreements, if required, may not be available on acceptable terms, if at all. In the event of a successful claim of infringement and our failure or inability to develop non-infringing technology or
license the proprietary rights on a timely basis, our business, operating results and financial condition could be materially adversely affected.

Operations

Our operations department is responsible for the management and support of our global data centers and
technology infrastructure 24 hours a day, 7 days a week, 365 days a year. We support and manage the transaction services business with enterprise-class technologies and tools. These technologies and tools are deployed and managed by strict adherence
to proven operational principles, processes, and procedures. We believe this technology, the processes, and our employees enable us to deliver the highest level of services and performance to our customers. As of December 31, 2007, we employed
71 persons in our operations department.

Customer Support

One of CyberSources key areas of focus is customer satisfaction. We provide a range of customer implementation and sustaining support services to ensure a high level of performance, reliability, and customer
satisfaction for our customers. These services ensure our customers get solutions implemented quickly, as well as provide the support necessary to identify and effectively resolve operational issues. Our offerings include phone support, online
ticketing, e-mail, chat, and self-help. Premium support is also offered to our enterprise customers, and includes support from dedicated technical account managers.

The Companys performance during 2007 was measured by CustomerSat, Inc. through surveys to customers using CyberSources services. CyberSource received CustomerSats Achievement in Customer Excellence
award in November of 2007 for enterprise support.



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As of December 31, 2007 we employed 115 persons in our customer support department.

Sales and Marketing

CyberSource maintains
distinct sales and marketing organizations for our enterprise and small businesses. We currently have active partnership relationships with approximately 3,800 resellers. Enterprise sales and marketing targets prospective customers worldwide through
a direct sales force as well as through resellers, managed commerce providers, and referral partners. Small business sales and marketing targets prospective small business customers domestically through resellers, affiliates, and inside sales.

Resellers: We have contractual relationships with our resellers that allow them to offer and bundle the CyberSource suite of services in
conjunction with their solution offering and facilitate the sale and billing of our services. Resellers are authorized to sell our hosted services and support services. Our resellers include banks and payment service providers, such as Bank of
America, Chase Paymentech, First Data Merchant Services, Independent Sales Organizations (ISOs), as well as a number of smaller partners.

Affiliate resellers for Authorize.Net are individuals and businesses who have merchant customers, but are not able to provide those merchant customers with payment services. The affiliate refers the merchant to
Authorize.Net and we then handle the setup, billing and ongoing support for their payment gateway. Affiliates receive a commission for each referral sale that we close, as well as a portion of the monthly fees and transaction fees generated by each
of the merchants.

Managed Commerce Providers (MCPs) and Affiliate Partners: Managed commerce providers typically host
customized and turnkey storefronts for online businesses. MCPs and Affiliate partners manage the entire customer relationship including operations, support, and billing. MCPs and Affiliate partners include internet service providers, application
service providers, and specialized systems integrators. MCP partners include: The Acquity Group LLC, ChannelAdvisor Corporation, Escalate Retail Inc., PFS Web and UniteU Technologies.

Referral Partners: These are companies with which we have referral agreements, structured with or without monetary incentives. These allies include
companies from the payment industry, independent software vendors, integrators and consulting firms, such as Demandware, MarketLive, and Netsuite.

In addition to channel and referral relationships, we pursue both solutions alliances and strategic alliances. These result in cooperative product development efforts, streamlining of integration capabilities and leveraged marketing
efforts. These solution alliances integrate CyberSource technology into some of their products, making it easier for their customers to access CyberSource products and services and include companies such as Oracle (includes PeopleSoft and Siebel),
and ATG.

Strategic Alliances: Our strategic alliances include our relationships with Bill me Later, PayPal, and Visa U.S.A. We work with
strategic alliances to enhance our existing solutions portfolio, develop new services and drive the adoption of industry standards.

As of
December 31, 2007, we employed a total of 111 employees in sales and marketing and an additional 13 professional service consultants.

Competition

The market for our products and services is intensely competitive and subject to rapid technological change. We expect competition to
intensify in the future.

We face competition from merchant acquirers, independent
sales organizations, and payment processors such as Chase Paymentech, First Data Corporation, and Royal Bank of Scotland. We also face competition from transaction service providers such as PayPal, Retail Decisions, and 41stParameter, as well as eCommerce providers such as Digital River and GSI Commerce Inc. Furthermore, other companies, including financial services and credit
companies may enter the market and provide competing services. Another source of competition comes from businesses that develop their own internal, custom-made systems. Such businesses typically make large initial investments to develop custom-made
systems and therefore, may be less likely to adopt outside services or vendor-developed online commerce transaction processing software.

We compete on the basis of certain factors, including:



| |  |  | system and product reliability;
| | - |  | -------------------------------

| |  |  | product performance;
| | - |  | --------------------



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| |  |  | features and functionality;
| | - |  | ---------------------------

| |  |  | outsourced management;
| | - |  | ----------------------

| |  |  | domain expertise;
| | - |  | -----------------

| |  |  | sales channels, operating environments and applications supported;
| | - |  | ------------------------------------------------------------------

| |  |  | ease of implementation and integration;
| | - |  | ---------------------------------------

| |  |  | time to market;
| | - |  | ---------------

| |  |  | customer support; and,
| | - |  | ----------------------

| |  |  | price.
| | - |  | ------

Presently, we believe that
we compete favorably with respect to each of these factors. However, the market for our solutions is rapidly evolving and we may not be able to compete successfully against current and future competitors. We expect that competitive pressures may
result in the reduction of our prices or our market share or both, which could materially and adversely affect our business, results of operations, or financial condition.

Employees

As of December 31, 2007, we had a total of 496 full-time employees, including 124
employees in professional services, sales, and marketing, 112 employees in product development, 186 employees in operations and customer support, and 74 employees in general and administrative services. None of our employees are represented by a
labor union and we consider employee relations to be good.

International Sales

Products and services provided to merchants outside the United States accounted for 8.7%, 10.0%, and 9.6% of our revenues in 2007, 2006, and 2005,
respectively.

Regulations

The
following regulations may adversely affect our business now or in the future:



| |  |  | Fair Credit Reporting Act.Because our fraud screening system assesses the probability of fraud in an online credit card transaction,
we may be deemed a consumer reporting agency under the Fair Credit Reporting Act. As a precaution, we have implemented processes that we believe will enable us to comply with the Act if we were deemed a consumer reporting agency. Complying with the
Act requires us to provide information about personal data stored by us. Failure to comply with the Act could result in claims being made against us by individual consumers and the Federal Trade Commission.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Export Control Regulations.    Current export control regulations prohibit the export of strong encryption technology without a license
unless exempt from license requirements, thereby preventing us from using stronger encryption technology to protect the security of data being transmitted to and from Internet merchants outside of the United States. We have obtained a license to use
1024-bit encryption technology with our international merchants. Furthermore, we believe that our products and services fall under certain licensing exemptions as financial products.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 1A:    RISK FACTORS.

Set forth below and elsewhere in this Annual Report on Form 10-K, including in Item 7, Managements Discussion and Analysis, and in other documents we file with the Securities and Exchange Commission are risks and uncertainties
that could cause actual results to differ materially from those described herein:

The Expected Fluctuations of Our Quarterly Results Could Cause Our
Stock Price to Fluctuate or Decline

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

Our quarterly results may fluctuate in the future as a result of many factors, including the following:



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



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| |  |  | our ability to attract new customers and to retain our existing customers;
| | - |  | --------------------------------------------------------------------------



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



| |  |  | the success of our integration of Authorize.Net;
| | - |  | ------------------------------------------------



| |  |  | customer acceptance of our pricing model;
| | - |  | -----------------------------------------



| |  |  | customer acceptance of our software and our professional services offerings;
| | - |  | ----------------------------------------------------------------------------



| |  |  | the success of our sales and marketing programs;
| | - |  | ------------------------------------------------



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



| |  |  | seasonality of the retail sector;
| | - |  | ---------------------------------



| |  |  | changes in accounting rules and regulations;
| | - |  | --------------------------------------------



| |  |  | war or other international conflicts; and
| | - |  | -----------------------------------------



| |  |  | weakness in the general U.S. economy and the lack of available capital for our customers and potential future customers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------

Other factors that may affect our quarterly results are set forth elsewhere in this section. As a result of these factors, our revenues are not
predictable with any significant degree of certainty.

Due to the uncertainty surrounding our revenues and expenses, we believe that
quarter-to-quarter comparisons of our historical operating results should not be relied upon as an indicator of our future performance.

We May Pursue
Strategic Acquisitions and Our Business Could be Materially and Adversely Affected if We Fail to Adequately Integrate Acquired Businesses

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



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



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



| |  |  | the diversion of managements attention from other business concerns; and
| | - |  | -------------------------------------------------------------------------



| |  |  | the potential loss of key employees of an acquired company.
| | - |  | -----------------------------------------------------------

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

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

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

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



11



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including that the integration may take longer than anticipated, be more costly than anticipated or have unanticipated adverse results relating to the two
former companies existing businesses.

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

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

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

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



| |  |  | persuading the employees that the two former companies business cultures are compatible and retaining the combined companys key personnel;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | maintaining former Authorize.Nets key reseller relationships;
| | - |  | --------------------------------------------------------------



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



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



| |  |  | keeping existing independent sales organization channels intact; and
| | - |  | --------------------------------------------------------------------



| |  |  | keeping and retaining key former Authorize.Net employees.
| | - |  | ---------------------------------------------------------

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

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

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

Our success will depend in part upon our ability to retain
key employees of both legacy CyberSource and legacy Authorize.Net. Competition for qualified personnel can be very intense. In addition, key employees may depart because of issues relating to the uncertainty or difficulty of integration or a desire
not to remain with the combined company. Accordingly, no assurance can be given that we will be able to retain key employees. Loss of key personnel could have a material adverse effect on our business and results of operations.

We Face Uncertainties Related to the Effectiveness of Internal Controls

Public companies in the United States are required to review their internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002. It should be noted that any system of controls,
however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of
future events. Because of these and other inherent



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limitations of control systems, there can be no assurance that any design will achieve its stated goal under all potential future conditions, regardless of
how remote.

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

Failure to Manage Future Growth Effectively May Have a Material Adverse Effect on Our Financial Condition and Results of Operations

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

Charges to Earnings Resulting From the Application of the Purchase Method of Accounting Might Adversely Affect the Market Value
of Our Common Stock

In accordance with United States generally accepted accounting principles (GAAP), the Authorize.Net
merger was accounted for using the purchase method of accounting, which will result in charges to earnings that could have an adverse impact on the market value of our common stock. Under the purchase method of accounting, the total estimated
purchase price was allocated to Authorize.Nets net tangible assets, identifiable intangible assets or expense for research and development based on their fair values as of November 1, 2007. Any excess of the purchase price over those fair
values will be recorded as goodwill. We will incur additional amortization expense based on the identifiable amortizable intangible assets acquired pursuant to the merger agreement and their relative useful lives. Additionally, to the extent the
value of goodwill or identifiable intangible assets or other long-lived assets may become impaired, we will be required to incur material charges relating to the impairment. These amortization and potential impairment charges could have a material
impact on our results of operations.

We currently estimate that we will initially incur approximately $29 million of incremental annual
amortization expense. Changes in earnings per share, including as a result of this incremental expense, could adversely affect the trading price of our common stock.

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

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



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



| |  |  | quarterly variations in our competitors results of operations;
| | - |  | ---------------------------------------------------------------



| |  |  | changes in earnings estimates or recommendations by securities analysts;
| | - |  | ------------------------------------------------------------------------



| |  |  | developments in our industry; and
| | - |  | ---------------------------------



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



13



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

The Intense Competition in Our Industry Could Reduce or Eliminate the Demand for
Our Products and Services

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

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

Potential System Failures and Lack of Capacity Issues Could Negatively Affect Demand for Our Services

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



| |  |  | denial of service attacks;
| | - |  | ----------------------------



| |  |  | computer viruses;
| | - |  | -----------------



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



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

Despite the fact that we have implemented redundant servers in third-party hosting centers located in San Jose
California, Seattle Washington, Denver Colorado, Phoenix Arizona, London England and Tokyo Japan, we may still experience service interruptions for the reasons listed above and a variety of other reasons. If our redundant servers are not available,
we may not have sufficient business interruption insurance to compensate us for resulting losses. We have experienced periodic interruptions, affecting all or a portion of our systems, which we believe will continue to occur from time to time. For
example, on November 12, 1999, our services were unavailable for approximately ten hours due to an internal system problem. We have also subsequently experienced service interruptions and performance issues. Any interruption in our systems that
impairs our ability to efficiently and timely provide services could damage our reputation and reduce demand for our services.

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

A Breach of Our eCommerce Security Measures Could Reduce Demand for Our Services

A requirement of the continued growth of e-Commerce is the secure transmission of confidential information over public networks. We rely
on public key cryptography, an encryption method that utilizes two keys, a public and a private key, for encoding and decoding data, and digital certificate technology, or identity verification, to provide the security and authentication



14



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necessary for secure transmission of confidential information. Regulatory and export restrictions may prohibit us from using the most secure cryptographic
protection available and thereby expose us to an increased risk of data interception. A party who is able to circumvent security measures could misappropriate proprietary information or interrupt our operations. Any compromise or elimination of
security could reduce demand for our services.

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

We Could Incur Chargeback or Merchant Fraud Losses

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

We have established systems and procedures designed to detect and reduce the impact of consumer fraud and merchant fraud, but we cannot assure you that
these measures are or will be effective. To date, we have not incurred any significant losses relating to charged back transactions. During 2007, our global acquiring revenue represented approximately 39.2% of our total revenue. Our global acquiring
revenue may also include fees generated for gateway services as it is becoming more common to charge the customer a bundled price for transaction services provided. To the extent our global acquiring revenue grows, our potential liability for such
chargebacks or merchant fraud increases.

Our Revenue and Customer Relationships Could be Impacted if We Were to Lose Bank Sponsorship

The card associations require a bank sponsor that ultimately assumes chargeback or merchant fraud losses if we were financially unable to assume such
losses. If our current bank sponsor were to terminate our agreement, we would be unable to provide global acquiring services, which could impact our future revenue and customer relationships.

If We Are Not Able to Fully Utilize Relationships With Our Sales Alliances, We May Experience Lower Revenue Growth and Higher Operating Costs

Our future growth will depend in part on the success of our relationships with existing and future sales alliances that market our products and services
to their merchant accounts. If these relationships are not successful or do not develop as quickly as we anticipate, our revenue growth may be adversely affected. Accordingly, we may have to increase our sales and marketing expenses in an attempt to
secure additional merchant accounts.

Our Market is Subject to Rapid Technological Change and to Compete We Must Continually Enhance Our Systems to
Comply with Evolving Standards

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



15



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merchant requirements or emerging industry standards. If we are unable to adapt to changing market conditions, merchant requirements or emerging industry
standards, our business would be materially harmed.

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

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

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

Our International Business Exposes Us to Additional Foreign Risks

Products and services provided to merchants outside the United States accounted for 8.7%, 10.0%, and 9.6% of our revenues in 2007, 2006, and 2005,
respectively. In March 2000, we entered into a joint venture agreement with Japanese partners Marubeni Corporation and Trans-Cosmos, Inc. and established CyberSource K.K. to provide commerce transaction services to the Japanese market. Conducting
business outside of the United States is subject to additional risks that may affect our ability to sell our products and services and result in reduced revenues, including:



| |  |  | changes in regulatory requirements;
| | - |  | -----------------------------------



| |  |  | reduced protection of intellectual property rights;
| | - |  | ---------------------------------------------------



| |  |  | evolving privacy laws in Europe;
| | - |  | --------------------------------



| |  |  | the burden of complying with a variety of foreign laws; and
| | - |  | -----------------------------------------------------------



| |  |  | war, political or economic instability or constraints on international trade.
| | - |  | -----------------------------------------------------------------------------

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

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

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

We have included employee stock-based compensation costs in our results of operations for the years ended December 31, 2007 and 2006, as discussed
in Note 1 in the Notes to Condensed Consolidated Financial Statements. The full impact is dependent upon, among other things, the outcome of our current assessment of different long-term incentive strategies involving stock awards in order to
continue to attract and retain employees, the total number of stock awards granted and the tax benefit that we may or may not receive from stock-based expenses. In addition, new regulations implemented by The Nasdaq Stock Market requiring
stockholder approval for all stock option plans could make it more difficult for us to grant options to employees in the future. To the extent that new regulations make it more difficult or expensive to grant stock options to employees, we may incur
increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business.



16



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

We believe our future success will depend upon our ability to retain our key management personnel, including William S. McKiernan, our
Chief Executive Officer, and other key members of management because of their experience and knowledge regarding the development, special opportunities and challenges of our business. None of our current key employees are subject to an employment
contract which enables us to retain them for a specific period of time. We may not be successful in attracting and retaining key employees in the future.

We May Not Be Able to Adequately Protect Our Proprietary Technology and May Be Infringing Upon Third-Party Intellectual Property Rights

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

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

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

We May Become Subject to Government Regulation and Legal Uncertainties That Would
Adversely Affect Our Financial Results

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



| |  |  | taxes;
| | - |  | ------



| |  |  | user privacy;
| | - |  | -------------



| |  |  | pricing;
| | - |  | --------



| |  |  | content;
| | - |  | --------



| |  |  | right to access personal data;
| | - |  | ------------------------------



| |  |  | copyrights;
| | - |  | -----------



| |  |  | distribution; and
| | - |  | -----------------



| |  |  | characteristics and quality of products and services.
| | - |  | -----------------------------------------------------

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

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



17



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

The Anti-Takeover
Provisions in Our Certificate of Incorporation Could Adversely Affect the Rights of the Holders of Our Common Stock

Anti-takeover
provisions of Delaware law and our Certificate of Incorporation may make a change in control more difficult to finalize, even if a change in control would be beneficial to the stockholders. These provisions may allow our Board of Directors to
prevent changes in our management and controlling interests. Under Delaware law, our Board of Directors may adopt additional anti-takeover measures in the future.

One anti-takeover provision that we have is the ability of our Board of Directors to determine the terms of preferred stock and issue preferred stock without the approval of the holders of the common stock. Our
Certificate of Incorporation allows the issuance of up to 5,610,969 shares of preferred stock. As of December 31, 2007, there are no shares of preferred stock outstanding. However, because the rights and preferences of any series of preferred
stock may be set by our Board of Directors in its sole discretion without approval of the holders of the common stock, the rights and preferences of this preferred stock may be superior to those of the common stock. Accordingly, the rights of the
holders of common stock may be adversely affected.

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

In July 2001, we entered into an agreement with Visa U.S.A. to jointly develop and promote the CyberSource Advanced Fraud Screen
Service Enhanced by Visa for use in the United States. Under the terms of the agreement, Visa agreed to promote and market the new product to its member financial institutions and Internet merchants. The agreement expires in July 2008, but can be
terminated by either party with ninety days prior written notice. Thereafter, the agreement renews automatically for additional periods of one year, unless terminated by either party.

ITEM 1B:    UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2:    PROPERTIES

Facilities

Our primary offices are located in approximately 72,000 square feet of space in Mountain View, California, under a lease expiring in
December 2011. We also maintain sales and support offices in leased space in Reading, United Kingdom.

In November 2007, we acquired
Authorize.Net Holdings, Inc. (Authorize.Net) and, as a result, occupy approximately 23,400 and 14,000 square feet of space in Bellevue, Washington and American Fork, Utah, respectively, with lease expiration dates in 2009 and 2010,
respectively. Also as a result of the acquisition of Authorize.Net, we currently lease approximately 80,000 square feet of office space in Burlington, Massachusetts, all of which is sublet as Authorize.Net vacated the office space during 2007. The
lease for the office space in Burlington, Massachusetts expires in 2011. Authorize.Net also had approximately 10,000 square feet of leased office space in Marlborough, Massachusetts which was vacated as of December 31, 2007, in connection with
our acquisition of Authorize.Net. Authorize.Net also leases approximately 30,000 square feet with a lease expiration date in 2008, for a former product development facility in Broomfield, Colorado. The Broomfield, Colorado facility has been
subleased for the balance of the lease term.

ITEM 3:    LEGAL PROCEEDINGS

In July and August 2001, various class action lawsuits were filed in the United States District Court, Southern District of New York, against us, our
Chairman and CEO, a former officer, and four brokerage firms that served as underwriters in our initial public offering. The actions were filed on behalf of persons who purchased our stock issued pursuant to or traceable to the initial public
offering during the period from June 23, 1999 through December 6, 2000. The action alleges that our underwriters charged secret excessive commissions to certain of their customers in return for allocations of our stock in the
offering. The two individual defendants are alleged to be liable because of their involvement in preparing and signing the registration statement for the offering, which allegedly failed to disclose the supposedly excessive commissions. On
December 7, 2001, an amended



18



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complaint was filed in one of the actions to expand the purported class to persons who purchased our stock issued pursuant to or traceable to the follow-on
public offering during the period from November 4, 1999 through December 6, 2000. The lawsuit filed against us is one of several hundred lawsuits filed against other companies based on substantially similar claims. On
April 19, 2002, a consolidated amended complaint was filed to consolidate all of the complaints and claims into one case. The consolidated amended complaint alleges claims that are virtually identical to the amended complaint filed on
December 7, 2001 and the original complaints. In October 2002, the claims against our officer and a former officer that were named in the amended complaint were dismissed without prejudice. In July 2002, we, along with other issuer
defendants in the case, filed a motion to dismiss the consolidated amended complaint with prejudice. On February 19, 2003, the court issued a written decision denying the motion to dismiss with respect to CyberSource and the individual
defendants. On July 2, 2003, a committee of our Board of Directors approved a proposed partial settlement with the plaintiffs in this matter. The settlement would have provided, among other things, a release of CyberSource and of the
individual defendants for the alleged wrongful conduct in the Amended Complaint in exchange for a guarantee from our insurers regarding recovery from the underwriter defendants and other consideration from us regarding our underwriters. The
plaintiffs have continued to litigate against the underwriter defendants. The district court directed that the litigation proceed within a number of focus cases rather than in all of the 310 cases that have been consolidated. Our case is
not one of these focus cases. On October 13, 2004, the district court certified the focus cases as class actions. The underwriter defendants appealed that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit
reversed the district courts class certification decision. On April 6, 2007, the Second Circuit denied plaintiffs petition for rehearing. In light of the Second Circuit opinion, we have informed the district court that this
settlement cannot be approved because the defined settlement class, like the litigation class, cannot be certified. We cannot predict whether we will be able to renegotiate a settlement that complies with the Second Circuits mandate. Due to
the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the matter. However, any direct financial impact of the proposed settlement is expected to be borne by our insurers.

On August 11, 2004, we filed suit in the Northern District of California against Retail Decisions, Inc. (ReD US) and Retail Decisions
Plc (ReD UK) (collectively, ReD), Case No. 3:04-CIV-03268, alleging that ReD infringes our U.S. Patent No. 6,029,154 (the 154 Patent). We served ReD US with the complaint on August 12, 2004,
and we served ReD UK with the complaint on August 13, 2004. On September 30, 2004, ReD responded to our complaint. ReD filed a motion to stay the case for 90 days pending a determination by the U.S. Patent and Trademark Office
(PTO) as to whether it will grant ReDs request that the PTO re-examine the 154 Patent. ReD also filed a motion for a more definite statement by us with respect to our allegation that ReD is willfully infringing the 154
Patent. In addition, ReD UK filed a motion to dismiss the action against it on the ground that it is not subject to personal jurisdiction in the Northern District of California. On October 27, 2004, ReD filed a request for re-examination with
the PTO, based on prior art ReD discovered that allegedly invalidates the Patent. On October 28, 2004, we filed an opposition to ReDs motion to stay the case for 90 days and an opposition to ReDs motion for a more definite statement
with respect to willful infringement. Based on ReD UKs representation that ReD US is the sole entity that develops, operates, and distributes the eBitGuard service, we agreed to dismiss ReD UK while reserving the right to reinstitute action
against ReD UK in the event we later discover that ReD UK is subject to the courts personal jurisdiction. In return, ReD UK agreed that if we later establish that personal jurisdiction existed, we could re-file against ReD UK in this action
without prejudice to our damages claim. We also filed an amended complaint, removing ReD UK as a named defendant and restating the willful infringement claim. On November 16, 2004, the court granted ReDs motion to stay the proceedings
pending the PTOs decision as to whether it will grant ReDs request for re-examination. On December 30, 2004, the PTO granted ReDs request for a re-examination. On January 19, 2005, ReD filed a motion to dismiss the case
without prejudice or to extend the stay until completion of the re-examination process. On January 24, 2005, the court extended the stay pending the re-examination process, vacated ReDs motion to dismiss, and ordered quarterly updates as
to the status of the re-examination process. On April 25, 2005, the parties filed a joint status report that was approved by the court. On June 20, 2005, the PTO issued a preliminary office action rejecting all of the claims of the
154 Patent based on one of the prior art references cited by ReD. On July 14, 2005, we met with the PTO examiner handling the re-examination to distinguish the prior art from the claims of the 154 Patent. On August 9, 2006, the
PTO issued a final office action rejecting all of the claims of the 154 Patent. On September 7, 2006, we filed a response to the office action requesting certain amendments to the claims. On October 10, 2006, the PTO filed a response
rejecting the amendments and extending our deadline to file a notice of appeal. On October 30, 2006, we filed a notice of appeal. On December 22, 2006, we filed the appeal brief. On May 3, 2007, the PTO issued a Notice of Intent
to Issue Reexam Certificate, reversing its action of August 9, 2006. Accordingly, the patent has been re-validated and we expect to receive a new patent certificate shortly. While there can be no assurances as to the outcome of the
lawsuit, we do not presently believe that the lawsuit would have a material effect on our financial condition, results of operations, or cash flows.

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



19



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

We held a Special Meeting of Stockholders on October 23, 2007 in connection with our acquisition of Authorize.Net. The stockholders voted on
proposals to:



| | 1. | Issue CyberSource common stock in connection with the mergers contemplated by the Agreement and Plan of Reorganization, dated June 17, 2007, by and among the Company,
Authorize.Net Holdings, Inc., Congress Acquisition-Sub, Inc., and Congress Acquisition Sub 1 LLC.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Amend the CyberSource Amended and Restated Certificate of Incorporation to increase the number of shares of authorized common stock, par value $0.001, from 50 million to 125
million.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Amend the CyberSource Amended and Restated 1999 Stock Option Plan to extend the plan for an additional three years and to increase the number of shares reserved there under from
11.0 million shares to 15.5 million shares.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | Grant discretionary authority to management of CyberSource to adjourn the special meeting to a date not later than November 22, 2007, if necessary, to solicit additional
proxies if there appear to be insufficient votes at the time of the special meeting to approve any of the foregoing proposals.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The proposals were approved by the following votes:



| | 1. | Issuance of CyberSource common stock in connection with the Mergers
| | -- | -------------------------------------------------------------------



|           |  |         |  |        
|---------- |  | ------- |  | -------
|For        |  | Against |  | Abstain
|27,676,707 |  | 50,999  |  | 22,960 



| | 2 | Amend the CyberSource Amended and Restated Certificate of Incorporation
| | - | -----------------------------------------------------------------------



|           |  |         |  |        
|---------- |  | ------- |  | -------
|For        |  | Against |  | Abstain
|33,498,409 |  | 319,255 |  | 46,851 



| | 3. | Amend the CyberSource Amended and Restated 1999 Stock Option Plan
| | -- | -----------------------------------------------------------------



|           |  |           |  |        
|---------- |  | --------- |  | -------
|For        |  | Against   |  | Abstain
|24,975,587 |  | 2,681,670 |  | 93,409 



| | 4. | Grant discretionary authority to management of CyberSource to adjourn the special meeting
| | -- | -----------------------------------------------------------------------------------------



|           |  |         |  |        
|---------- |  | ------- |  | -------
|For        |  | Against |  | Abstain
|32,968,517 |  | 802,736 |  | 93,262 

PART II

ITEM 5:    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Since our initial public offering on June 23, 1999, our common stock has traded on the NASDAQ Global Market under the symbol CYBS. Since January 1, 2008, our stock has traded on the NASDAQ Global
Select market under the symbol CYBS. The following table sets forth the range of high and low closing sales prices of our common stock for the periods indicated:



|                             |  |      |       |     |   |      
|---------------------------- |  | ---- | ----- | --- | - | -----
|Year ended December 31, 2006 |  | High |       | Low
|First Quarter                |  | $    | 11.16 |     | $ | 6.48 
|Second Quarter               |  | $    | 11.70 |     | $ | 8.47 
|Third Quarter                |  | $    | 12.30 |     | $ | 9.70 
|Fourth Quarter               |  | $    | 11.30 |     | $ | 9.61 
|                             |  |     
|Year ended December 31, 2007 |  | High |       | Low
|First Quarter                |  | $    | 13.45 |     | $ | 11.12
|Second Quarter               |  | $    | 13.68 |     | $ | 12.06
|Third Quarter                |  | $    | 13.82 |     | $ | 11.03
|Fourth Quarter               |  | $    | 18.93 |     | $ | 11.65



20



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We had approximately 350 shareholders of record as of February 13, 2008. We have not declared or
paid any cash dividends on our common stock and presently intend to retain our future earnings to fund the development and growth of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future.

In the fourth quarter of 2007, we did not repurchase any shares under the stock repurchase program.

ITEM 6:    SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Form 10-K. The historical results are not necessarily indicative of future results.

SELECTED CONSOLIDATED
FINANCIAL DATA



|                                                                                        |  |                                       |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|--------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                                        |  | Year Ended December 31,               |        
|                                                                                        |  | 2007(1)                               |         |   | 2006 |   |        | 2005 |  |   | 2004   |   |  | 2003 |       
|                                                                                        |  | (In thousands, except per share data) |        
|Consolidated Statements of Operations Data:                                             |  |                                       |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Revenues                                                                                |  | $                                     | 116,999 |   |      | $ | 70,250 |      |  | $ | 50,511 |   |  | $    | 36,709 |   |  | $ | 27,503 |  
|Cost of revenues                                                                        |  |                                       | 62,113  |   |      |   | 34,627 |      |  |   | 20,492 |   |  |      | 12,023 |   |  |   | 9,293  |  
|                                                                                        |  |                                       |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Gross profit                                                                            |  |                                       | 54,886  |   |      |   | 35,623 |      |  |   | 30,019 |   |  |      | 24,686 |   |  |   | 18,210 |  
|Operating expenses:                                                                     |  |                                       |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Product development                                                                     |  |                                       | 13,397  |   |      |   | 9,283  |      |  |   | 8,000  |   |  |      | 6,772  |   |  |   | 7,529  |  
|Sales and marketing                                                                     |  |                                       | 25,685  |   |      |   | 14,443 |      |  |   | 11,140 |   |  |      | 10,065 |   |  |   | 11,164 |  
|General and administrative                                                              |  |                                       | 14,979  |   |      |   | 9,861  |      |  |   | 6,031  |   |  |      | 5,551  |   |  |   | 4,942  |  
|Restructuring and other non-recurring charges (recoveries)                              |  |                                       | 1,755   |   |      |   |       |      |  |   |       |   |  |      | (1,493 | ) |  |   | 467    |  
|                                                                                        |  |                                       |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total operating expenses                                                                |  |                                       | 55,816  |   |      |   | 33,587 |      |  |   | 25,171 |   |  |      | 20,895 |   |  |   | 24,102 |  
|                                                                                        |  |                                       |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Income (loss) from operations                                                           |  |                                       | (930    | ) |      |   | 2,036  |      |  |   | 4,848  |   |  |      | 3,791  |   |  |   | (5,892 | )
|Interest income, net                                                                    |  |                                       | 2,726   |   |      |   | 2,344  |      |  |   | 1,324  |   |  |      | 695    |   |  |   | 625    |  
|Other income (loss), net                                                                |  |                                       | 314     |   |      |   | 341    |      |  |   |       |   |  |      |       |   |  |   | (175   | )
|Income tax provision (benefit)                                                          |  |                                       | (319    | ) |      |   | (9,690 | )    |  |   | (3,074 | ) |  |      | 25     |   |  |   |       |  
|                                                                                        |  |                                       |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net income (loss)                                                                       |  | $                                     | 2,429   |   |      | $ | 14,411 |      |  | $ | 9,246  |   |  | $    | 4,461  |   |  | $ | (5,442 | )
|                                                                                        |  |                                       |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Basic net income (loss) per share                                                       |  | $                                     | 0.06    |   |      | $ | 0.42   |      |  | $ | 0.28   |   |  | $    | 0.13   |   |  | $ | (0.17  | )
|                                                                                        |  |                                       |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Diluted net income (loss) per share                                                     |  | $                                     | 0.06    |   |      | $ | 0.39   |      |  | $ | 0.26   |   |  | $    | 0.12   |   |  | $ | (0.17  | )
|                                                                                        |  |                                       |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Weighted average number of shares used in computing basic net income (loss) per share   |  |                                       | 40,736  |   |      |   | 34,623 |      |  |   | 33,464 |   |  |      | 33,448 |   |  |   | 32,860 |  
|                                                                                        |  |                                       |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Weighted average number of shares used in computing diluted net income (loss) per share |  |                                       | 43,225  |   |      |   | 36,593 |      |  |   | 35,811 |   |  |      | 35,884 |   |  |   | 32,860 |  
|                                                                                        |  |                                       |         |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  



|                                                     |  |                |         |      |   |        |  |      |        |      |   |        |  |   |       
|---------------------------------------------------- |  | -------------- | ------- | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                     |  | December 31,  
|                                                     |  | 2007(1)        |         | 2006 |   | 2005   |  | 2004 |        | 2003
|                                                     |  | (In thousands)
|Consolidated Balance Sheet Data:                     |  |                |         |      |   |        |  |      |        |      |   |        |  |   |       
|Cash and cash equivalents and short-term investments |  | $              | 40,393  |      | $ | 54,944 |  | $    | 47,001 |      | $ | 44,703 |  | $ | 44,361
|Working capital                                      |  |                | 32,696  |      |   | 60,286 |  |      | 53,234 |      |   | 45,468 |  |   | 41,629
|Total assets                                         |  |                | 537,747 |      |   | 87,043 |  |      | 65,327 |      |   | 55,280 |  |   | 54,807
|Total stockholders equity                           |  |                | 503,214 |      |   | 78,628 |  |      | 56,933 |      |   | 47,499 |  |   | 44,195



|(1) | The 2007 Selected Consolidated Financial Data includes the balance sheet of Authorize.Net as of December 31, 2007 and the operating results of Authorize.Net for the period from
November 1, 2007, the date of acquisition, to December 31, 2007. The 2007 Selected Consolidated Financial Data also includes restructuring and other non-recurring charges of approximately $1.8 million related to the closure of BidPay.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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ITEM 7:    MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be
read in conjunction with our consolidated financial statements and the related notes included elsewhere in this document.

This Report on
Form 10-K contains forward-looking statements within the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our
expectations, hopes, intentions, beliefs or strategies regarding the future. Actual results could differ materially from those projected in any forward-looking statements for the reasons noted under the sub-heading Risk Factors and in
other sections of this Report on Form 10-K. All forward-looking statements included in this Form 10-K are based on information available to us on the date of this Report on Form 10-K, and we assume no obligation to update the forward-looking
statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. See Risk Factors above, as well as such other risks and uncertainties as are detailed in our Securities and
Exchange Commission reports and filings for a discussion of the factors that could cause actual results to differ materially from the forward-looking statements.

Overview

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

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

Authorize.Net Acquisition

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

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

The consolidated statement of income includes revenues and expenses of Authorize.Net for the period from November 1,
2007, the date of acquisition, to December 31, 2007, including approximately $4.1 million of amortization expense related to the Authorize.Net intangible assets. See Note 2 of our consolidated financial statements.

BidPay.com Closure

In December of
2007, we announced the closure of BidPay.com, Inc. (BidPay). As a result, we recorded a restructuring charge of approximately $1.8 million in the fourth quarter of 2007.

Critical Accounting Policies

Our financial statements are based on the selection and application of
significant accounting policies, which require management to make significant estimates and assumptions. We believe that the following are the more critical judgment areas in the application of our accounting policies that currently affect our
financial condition and results of operations.



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Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104). SAB 104 requires that four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Determination of criteria (4) is
based on managements judgments regarding the collectibility of fees. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be
adversely affected.

We derive a significant portion of our transaction processing revenues from global acquiring fees charged to merchants
for payment processing services. Our fees, which are primarily a percentage of the dollar amount of each transaction processed, are based upon the merchants monthly charge volume and risk profile. In addition, we record revenues for
miscellaneous services related to global acquiring, such as fees for processing credit card chargebacks. In accordance with Emerging Issues Task Force 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent (EITF 99-19), we
recognize these fees on a gross basis as we are the primary agent in the transaction in the period the merchants transactions are processed. Related interchange fees paid to card issuing banks and assessments paid to credit card associations
are recognized in cost of revenues at that time.

Accounts Receivable

We maintain allowances for doubtful accounts for estimated losses resulting from the potential inability of our customers to make required payments as
well as for potential sales returns. If the financial condition of our customers was to deteriorate, resulting in their inability to make payments, additional allowances may be required. These estimates are based on historical bad debt experience
and other known factors. If the historical data we used to determine these estimates does not properly reflect future losses, additional allowances may be required.

Reserve for Merchant Losses

We have potential liability for certain transactions processed through
our global acquiring services if the payments associated with such transactions are rejected, refused, or returned for reasons such as consumer fraud or billing disputes. For instance, if a billing dispute between a merchant and payer is not
ultimately resolved in favor of the merchant, the disputed transaction may be charged back to the merchants bank and credited to the payers account. If the charged back amount cannot be recovered from the merchants account, or if
the merchant refuses or is financially unable to reimburse its bank for the charged back amount, we may bear the loss for the amount of the refund paid to the payers bank. We could also incur fraud losses as a result of merchant fraud.
Merchant fraud occurs when a merchant, rather than a customer, intentionally uses a stolen or counterfeit card, card number, or other bank account number to process a false sales transaction, or knowingly fails to deliver merchandise or services in
an otherwise valid transaction. We may be responsible for any losses for certain transactions if we are unable to collect from the merchant. We evaluate the merchants risk for potential losses based on historical experience and other relevant
factors and record a loss reserve accordingly. If the data we use to determine potential losses does not properly reflect future losses, additional reserves may be required.

Legal Contingencies

We are
currently involved in certain legal proceedings and are required to assess the likelihood of any adverse judgments or outcomes of these proceedings as well as potential ranges of probable losses. A determination of the amount of accruals required,
if any, for these contingencies is made after careful analysis. As discussed in Note 13 of our consolidated financial statements, as of December 31, 2007, we do not believe our current proceedings will have a material impact on our consolidated
financial condition, results of operations or cash flows. It is possible, however, that future results of operations for any particular quarter or annual period could be materially affected by changes in our assumptions or as a result of the
effectiveness of our strategies related to these proceedings.

Accounting for Income Taxes

We account for income taxes using the liability method, which requires the recognition of deferred tax assets or liabilities for the tax-effected
temporary differences between the financial reporting and tax bases of our assets and liabilities, and for net operating loss and tax credit carryforwards. Prior to the fourth quarter of 2005, we recorded a full valuation allowance to reserve for
the benefit of our deferred tax assets due to the uncertainty surrounding our ability to realize these assets.

During the fourth quarter
of 2005, we recorded an income tax benefit of $3.1 million. This benefit included a $3.2 million reduction in the valuation allowance related to a portion of our deferred tax assets that will more likely than not be realized. This determination was
primarily based on one year of projected taxable income. During the fourth quarter of 2006, we recorded an



23



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income tax benefit of $11.0 million. This benefit included a $9.9 million reduction in the valuation allowance related to a portion of our deferred tax
assets that will more likely than not be realized, based on three years of future projected taxable income. During the fourth quarter of 2007, we recorded an income tax benefit of $1.1 million. This benefit included a $1.0 million reduction in the
valuation allowance related to a portion of our deferred tax assets that will more likely than not be realized, based on three years of future projected taxable income. In addition, as a result of our acquisition of Authorize.Net, we recorded as an
adjustment to goodwill a $34.5 million reduction in the valuation allowance related to a portion of our deferred tax assets that will more likely than not be realized. In evaluating our ability to realize our deferred tax assets we consider all
available positive and negative evidence including our past operating results and our forecast of future taxable income. In determining future taxable income, we make assumptions to forecast federal, state, and international operating income, the
reversal of temporary differences, and the implementation of any feasible and prudent tax planning strategies. These assumptions require significant judgment regarding the forecasts of future taxable income, and are consistent with the forecasts
used to manage our business. We intend to maintain the remaining valuation allowance until sufficient further positive evidence exists to support further reversals of the valuation allowance. Our income tax expense recorded in the future will be
reduced to the extent of offsetting decreases in our valuation allowance.

Stock-based Compensation

The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based
Payment (SFAS 123R), which the Company adopted as of January 1, 2006 (the Companys first fiscal quarter of 2006), using the modified prospective method. Total stock-based compensation expense recognized in the
consolidated statement of operations for the years ended December 31, 2007 and 2006 was $7.0 and $4.7 million, respectively, before income taxes. As of December 31, 2007, total unrecognized stock-based compensation expense related to
non-vested stock options was approximately $18.4 million, which is expected to be recognized over a weighted average period of approximately 2.8 years.

Under the fair value recognition provisions of SFAS 123R, we used the Black-Scholes option valuation model to estimate stock-based compensation expense at the grant date based on the fair value of the award and we
will recognize the expense ratably over the requisite service period of the award. Determining the appropriate fair value model and assumptions used in calculating the fair value of stock-based awards requires judgment, including estimating stock
price volatility, forfeiture rates and expected life.

Long-Lived Assets

Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (SFAS 142) requires that we perform
tests for impairment of our goodwill annually and between annual tests in certain circumstances. As of December 31, 2007, we had recorded goodwill in connection with our acquisition of Authorize.Net with a carrying value of approximately $291.5
million. Significant judgments could be required to evaluate goodwill for impairment in the future including the determination of reporting units, estimating future cash flows, determining appropriate discount rates and other assumptions. We will
evaluate the goodwill related to the Authorize.Net acquisition on an annual basis as of July 31.

Statement of Financial Accounting
Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144) requires that we perform tests for impairment of our intangible assets subject to amortization annually and more frequently
whenever events or circumstances suggest that our intangible assets may be impaired. As of December 31, 2007, we had recorded intangible assets in connection with our acquisition of Authorize.Net, with a carrying value of approximately $158.3
million, consisting of partner contracts and related relationships, merchant contracts and related relationships, existing technology, trade name and processor relationships. The value of the partner contracts and related relationships as well as
the merchant contracts and related relationships were derived by considering, among other factors, the expected income and discounted cash flows to be generated from such contracts and relationships. The value of the existing technology was derived
by considering, among other factors, the expected income and discounted cash flows to be generated, taking into account risks related to the characteristics and applications of the technology and assessments of the life cycle state of the
technology. The value of the trade name was derived by considering, among other factors, expected income and discounted cash flows to be generated, also taking into account the expected period in which the company intends to utilize the trade name.
The value of the processor relationships was derived by considering the expected cost that would be incurred to establish and build connections with the processors.

To evaluate potential impairment, SFAS 142 and SFAS 144 require us to assess whether the estimated fair value of our goodwill and intangible assets are greater than their carrying value at the time of the test.
Accordingly, there could be significant judgment in determining the fair values attributable to our goodwill and intangible assets, including the determination of reporting units, estimating future cash flows, determining appropriate discount rates
and other assumptions.



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As we are required to periodically evaluate our goodwill and intangible asset balances for impairment, if
we incur impairments to our intangible assets, it would have an adverse impact on our future earnings.

Results of Operations

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



|                               |  |                         |    |  |       |    |  |       |   
|------------------------------ |  | ----------------------- | -- |  | ----- | -- |  | ----- | --
|                               |  | Year Ended December 31, |   
|                               |  | 2007                    |    |  | 2006  |    |  | 2005  |   
|Revenues                       |  | 100.0                   | %  |  | 100.0 | %  |  | 100.0 | % 
|Cost of revenues               |  | 53.1                    | %  |  | 49.3  | %  |  | 40.6  | % 
|                               |  |                         |    |  |       |    |  |       |   
|Gross profit                   |  | 46.9                    | %  |  | 50.7  | %  |  | 59.4  | % 
|Operating expenses:            |  |                         |    |  |       |    |  |       |   
|Product development            |  | 11.5                    | %  |  | 13.2  | %  |  | 15.8  | % 
|Sales and marketing            |  | 22.0                    | %  |  | 20.6  | %  |  | 22.1  | % 
|General and administrative     |  | 12.7                    | %  |  | 14.0  | %  |  | 11.9  | % 
|Restructuring charges          |  | 1.5                     | %  |  |      |    |  |      |   
|                               |  |                         |    |  |       |    |  |       |   
|Total operating expenses       |  | 47.7                    | %  |  | 47.8  | %  |  | 49.8  | % 
|                               |  |                         |    |  |       |    |  |       |   
|Income from operations         |  | (0.8                    | %) |  | 2.9   | %  |  | 9.6   | % 
|Other income                   |  | 0.3                     | %  |  | 0.5   | %  |  |      |   
|Interest income                |  | 2.3                     | %  |  | 3.3   | %  |  | 2.6   | % 
|                               |  |                         |    |  |       |    |  |       |   
|Income before income taxes     |  | 1.8                     | %  |  | 6.7   | %  |  | 12.2  | % 
|Income tax provision (benefit) |  | (0.3                    | %) |  | (13.8 | %) |  | (6.1  | %)
|                               |  |                         |    |  |       |    |  |       |   
|Net income                     |  | 2.1                     | %  |  | 20.5  | %  |  | 18.3  | % 
|                               |  |                         |    |  |       |    |  |       |   

Years Ended December 31, 2007 and 2006

Revenues.    Revenues increased to $117.0 million in 2007, an increase of approximately $46.7 million or 66.5% as compared to
$70.3 million in 2006. Approximately 28% of the increase in revenues was attributable to Authorize.Net for the period of November 1, 2007 to December 31, 2007. Approximately 40% of the increase in revenues was from existing customers,
primarily resulting from an increase in global acquiring services revenue as well as an increase in transaction volumes processed. The remaining increase in revenues was from new customers that entered into contracts during the twelve months ended
December 31, 2007. We processed approximately 1.2 billion transactions in 2007 as compared to approximately 854.2 million transactions in 2006, an increase of approximately 45%. Approximately 8% of the increase in transaction volumes was
attributable to Authorize.Net for the period of November 1, 2007 to December 31, 2007. Global acquiring revenues represented approximately 39.2% of our revenues for the year ended December 31, 2007, as compared to 33.3% for the year
ended December 31, 2006.

Cost of Revenues.    Cost of revenues consist primarily of costs incurred in the
delivery of e-commerce transaction services, including personnel costs in our operations and customer support functions, processing and interchange fees paid relating to our global acquiring services, other third-party fees, depreciation of capital
equipment used in our network infrastructure and costs related to the hosting of our servers at third-party hosting centers in the United States and the United Kingdom. Cost of revenues increased to $62.1 million or 53.1% of revenues in 2007 from
$34.6 million or 49.3% of revenues in 2006. The increase in absolute dollars is primarily due to higher processing fees paid to third parties such as the credit card issuing banks, payment processors and card associations related to our global
acquiring services, which are variable costs that will increase in absolute dollars as the related revenue increases and will decrease as the related revenue decreases. In addition, cost of revenues in 2007 includes Authorize.Net cost of revenues
for the period of November 1, 2007 to December 31, 2007. Also as a result of our acquisition of Authorize.Net, cost of revenues in 2007 includes approximately $1.1 million of intangible amortization expense related to existing technology
and processor relationships. We expect intangible amortization expense included in cost of revenues to increase significantly during 2008 as the amount included in 2007 only represents amortization for two months. Included in cost of revenues for
the years ended December 31, 2007 and 2006, is approximately $0.9 million and $0.6 million, respectively, of stock-based compensation expense.

Product Development.    Product development expenses consist primarily of compensation and related costs of employees engaged in the research, design and development of new services, and to a lesser extent,
facility costs and related overhead.



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Product development expenses increased to $13.4 million in 2007 from $9.3 million in 2006, an increase of 44.3%. The increase in absolute dollars is
primarily due to an increase in headcount and related compensation expense of approximately $3.1 million, and an increase in expenses related to BidPay of approximately $0.4 million. Stock-based compensation expense included in product development
expenses was approximately $1.4 million and $0.8 million for the years ended December 31, 2007 and 2006, respectively. As a percentage of revenue, product development expenses decreased to 11.5% in 2007 as compared to 13.2% in 2006. The
decrease is primarily due to the increase in revenue from existing and new customers as well as from the Authorize.Net acquisition, offset to a certain extent by the increase in product development expenses during 2007. We expect product development
expenses will increase in absolute dollars during 2008 due primarily to the increased headcount resulting from our acquisition of Authorize.Net, offset to a certain extent by a decrease in expenses related to BidPay. As a percentage of revenue, we
expect product development expenses in 2008 to moderately decrease as compared to 2007 due primarily to expected revenue growth.

Sales
and Marketing.    Sales and marketing expenses consist primarily of compensation of sales and marketing personnel, commissions paid to outside sales agents, market research and advertising costs, and, to a lesser extent,
facility costs and related overhead. Sales and marketing expenses increased to $25.7 million in 2007 from $14.4 million in 2006, an increase of 77.8%. The increase in absolute dollars is primarily due to an increase in headcount and related
compensation expense of approximately $3.9 million and an increase in commissions paid to outside sales agents of approximately $3.1 million, related to sales of our Authorize.Net services. Also as a result of our acquisition of Authorize.Net, sales
and marketing expenses in 2007 include approximately $3.0 million of intangible asset amortization expense related to the Authorize.Net trade name, partner contracts and related relationships as well as merchant contracts and related relationships.
We expect intangible amortization expense included in sales and marketing expenses to increase significantly during 2008 as the amount included in 2007 only represents amortization for two months. Stock-based compensation expense included in sales
and marketing expenses was approximately $1.4 million and $1.0 million for the years ended December 31, 2007 and 2006, respectively. As a percentage of revenue, sales and marketing expenses increased to 22.0% in 2007 as compared to 20.6% in
2006. The increase is primarily due to the increase in sales and marketing expenses during 2007, offset to a certain extent by the increase in revenue during 2007 from existing and new customers as well as from the Authorize.Net acquisition. We
expect that sales and marketing expenses will increase in absolute dollars and as a percentage of revenue during 2008 due primarily to the increased commissions paid to outside sales agents as well as the increased headcount resulting from our
acquisition of Authorize.Net.

General and Administrative.    General and administrative expenses consist
primarily of compensation for administrative personnel, fees for outside professional services and, to a lesser extent, facility costs and related overhead. General and administrative expenses increased to $15.0 million in 2007 from $9.9 million in
2006, an increase of 51.9%. The increase is primarily due to an increase in headcount and related compensation expense of approximately $2.5 million and, to a lesser extent, an increase in third party professional fees of approximately $1.6 million
which includes integration fees related to the acquisition of Authorize.Net of approximately $0.9 million. Stock-based compensation expense included in general and administrative expenses was approximately $3.3 million and $2.2 million for the years
ended December 31, 2007 and 2006, respectively. As a percentage of revenue, general and administrative expenses decreased to 12.7% in 2007 as compared to 14.0% in 2006. The decrease is primarily due to the increase in revenue during 2007 from
existing and new customers as well as from the Authorize.Net acquisition, offset to a certain extent, by the increases in compensation expense and third party professional fees. We expect general and administrative expenses will increase in absolute
dollars in 2008 due primarily to the increased headcount resulting from our acquisition of Authorize.Net, offset to a certain extent by a decrease in expenses related to BidPay. As a percentage of revenue, we expect general and administrative
expenses in 2008 to moderately decrease as compared to 2007 due primarily to expected revenue growth.

Restructuring
Charges.    In December of 2007, we announced the closure of BidPay. As a result, we recorded a restructuring charge of approximately $1.8 million in the fourth quarter of 2007. This charge included $1.6 million for the
write-off of intangible assets, net of deferred tax liabilities, $0.1 million of severance related to terminated employees and $0.1 million for the impairment of property and equipment.

Other Income.Other income for 2007 consists primarily of joint venture income from CyberSource K.K. of approximately $0.2
million and exchange rate gains of approximately $0.1 million. Other income for 2006 consists primarily of settlement proceeds of $0.4 million we received for dismissing a lawsuit that we filed against CardSystems Solutions, Inc. in October 2005.
Also included in other income for 2006 are exchange rate losses of approximately $0.1 million and joint venture income of approximately $41,000.

Interest Income.    Interest income which consists of interest earnings on cash and cash equivalents and short-term investments increased to $2.7 million in 2007 from $2.3 million in 2006, an increase of 16.3%.
The increase is primarily due to higher investment yields and higher average cash and cash equivalent and short-term investment balances during 2007 as



26



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compared to 2006. We expect interest income to decrease in 2008 due to anticipated lower average cash and cash equivalents and short-term investment
balances, resulting from the acquisition of Authorize.Net as well as lower expected investment yields.

Income Tax
Benefit.    We recorded an income tax benefit of $0.3 million in 2007 as compared to $9.7 million in 2006. Included in the $0.3 million income tax benefit was a $1.0 million reversal of the valuation allowance related to a
portion of our deferred tax assets, which was recorded in the fourth quarter of 2007, offset by amounts accrued for our estimated 2007 federal, state and foreign income tax liabilities. In addition, as a result of our acquisition of Authorize.Net,
we recorded as an adjustment to goodwill a $34.5 million reduction in the valuation allowance related to a portion of our deferred tax assets that will more likely than not be realized. Included in the $9.7 million income tax benefit was a $9.9
million reversal of the valuation allowance related to a portion our deferred tax assets, which was recorded in the fourth quarter of 2006, offset by amounts accrued for our estimated 2006 federal, state and foreign income tax liabilities. The
reversals of the valuation allowance were based our analysis of our tax assets that we expect to realize on a more likely than not basis.

As of December 31, 2007, we had federal and state net operating loss carryforwards of approximately $196.3 million and $40.6 million, respectively. Of these amounts, $15.2 million represent tax deductions from stock option compensation
which will be recorded as an adjustment to additional paid-in capital when they reduce taxes payable. If we are not able to use them, the federal and state net operating loss carryforwards will expire in 2013 through 2024. The Tax Reform Act of 1986
imposes substantial restrictions on the utilization of net operating losses and tax credits in the event of a corporations ownership change, as defined in the Internal Revenue Code. Our ability to utilize net operating loss carryforwards may
be limited if such an ownership change occurs.

Years Ended December 31, 2006 and 2005

Revenues.    Revenues increased to $70.3 million in 2006, an increase of approximately $19.7 million or 39.1% as compared to
$50.5 million in 2005. Approximately 80% of the increase in revenues was from existing customers, primarily resulting from an increase in global acquiring services revenue as well as an increase in transaction volumes processed. The remaining
increase in revenues was from new customers that entered into contracts during the twelve months ended December 31, 2006. We processed approximately 854.2 million transactions in 2006 as compared to approximately 637.1 million
transactions in 2005, an increase of approximately 34%. Global acquiring revenues represented approximately 33.3% of our revenues for the year ended December 31, 2006, as compared to 21.9% for the year ended December 31, 2005.

Cost of Revenues.    Cost of revenues increased to $34.6 million or 49.3% of revenues in 2006 from $20.5 million or
40.6% of revenues in 2005. The increase in absolute dollars and as a percentage of revenues was primarily due to higher processing fees paid to third parties such as the credit card issuing banks, payment processors and card associations related to
our global acquiring services, which are variable costs that will increase in absolute dollars as the related revenue increases and will decrease as the related revenue decreases. Included in cost of revenues for the year ended December 31,
2006, was approximately $0.6 million of stock-based compensation expense.

Product Development.    Product
development expenses increased to $9.3 million in 2006 from $8.0 million in 2005, an increase of 16.0%. The increase in absolute dollars was primarily due to an increase in headcount and related compensation expense of approximately $1.2
million, including stock-based compensation of approximately $0.8 million. As a percentage of revenue, product development expenses decreased to 13.2% in 2006 as compared to 15.8% in 2005. The decrease was primarily due to the increase in revenue
from existing and new customers, offset to a certain extent by the increase in product development expenses during 2006.

Sales and
Marketing.    Sales and marketing expenses increased to $14.4 million in 2006 from $11.1 million in 2005, an increase of 29.7%. The increase in absolute dollars was primarily due to an increase in headcount and related
compensation expense of approximately $2.9 million, including stock-based compensation of approximately $1.0 million. As a percentage of revenue, sales and marketing expenses decreased to 20.6% in 2006 as compared to 22.1% in 2005. The decrease was
primarily due to the increase in revenue from existing and new customers during 2006, offset to a certain extent by the increase in sales and marketing expenses during 2006.

General and Administrative.    General and administrative expenses increased to $9.9 million in 2006 from $6.0 million
in 2005, an increase of 63.5%. The increase was primarily due to an increase in headcount and related compensation expense of approximately $3.5 million, including stock-based compensation expense of approximately $2.2 million and, to a lesser
extent, an increase in third party professional fees of approximately $0.2 million. As a percentage of revenue, general and administrative expenses increased to 14.0% in 2006 as compared to 11.9% in 2005. The increase was primarily due to the
increases in compensation expense and third party professional fees, offset to a certain extent, by the increase in revenue from existing and new customers during 2006.



27



---

Other Income.Other income for 2006 consists primarily of settlement
proceeds of $0.4 million received resulting from a lawsuit we filed against CardSystems Solutions, Inc. (CardSystems) and individual members of CardSystems board of directors, alleging breach of contract, promissory estoppel, fraud
and unjust enrichment. Also included in other income was exchange rate losses of approximately $0.1 million and joint venture income of approximately $41,000.

Interest Income.    Interest income which consists of interest earnings on cash, cash equivalents and short-term investments increased to $2.3 million in 2006 from $1.3 million in 2005, an
increase of 77.0%. This increase was primarily due to an increase in average balances of cash, cash equivalents and short-term investments during 2006 as compared to 2005 as a result of our income from operations in 2006 and slightly higher
investment yields.

Income Tax Benefit.    We recorded an income tax benefit of $9.7 million in 2006 as compared
to $3.1 million in 2005, an increase of 215.2%. Included in the $3.1 million income tax benefit was a $3.2 million reversal of the valuation allowance related to a portion our deferred tax assets, which was recorded in the fourth quarter of 2005,
offset by amounts accrued for our estimated 2005 federal, state and foreign income tax liabilities.

Related Party

For the years ended December 31, 2007, 2006, and 2005, legal fees of approximately $1.2 million, $0.4 million and $0.5 million, respectively, were
paid to Morrison & Foerster LLP, a law firm in which one of our directors is a partner. As of December 31, 2007 and 2006, we had immaterial amounts of accounts payable due to Morrison & Foerster LLP.

The terms of our contracts with the above related party are consistent with our contracts with other independent parties.

Liquidity and Capital Resources

Our cash and cash
equivalents and short-term investments were $40.4 million as of December 31, 2007 compared to $54.9 million as of December 31, 2006. Cash and cash equivalents and short-term investments decreased $14.5 million from December 31, 2006
to December 31, 2007. This decrease is primarily due to the following (in thousands):



|                                              |  |                         |         |   |      |   |        |  
|--------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ | -
|                                              |  | Year Ended December 31, |        
|                                              |  | 2007                    |         |   | 2006 |  
|Cash provided by operating activities         |  | $                       | 13,815  |   |      | $ | 9,841  |  
|Proceeds from issuance of common stock        |  |                         | 6,928   |   |      |   | 4,672  |  
|Cash used in the acquisition of Authorize.Net |  |                         | (25,734 | ) |      |   |       |  
|Acquisition of BidPay                         |  |                         |        |   |      |   | (1,990 | )
|Purchases of equipment                        |  |                         | (4,574  | ) |      |   | (2,506 | )
|Repurchases of common stock                   |  |                         | (5,032  | ) |      |   | (2,461 | )

Cash used in the acquisition of Authorize.Net includes severance payments to certain former
employees and directors of Authorize.Net of approximately $29.4 million and third-party professional fees of approximately $8.4 million, offset to a certain extent, by cash acquired from Authorize.Net of approximately $12.1 million.

We believe that our cash and short-term investment balances as of December 31, 2007 will be sufficient to meet our working capital and capital
requirements for at least the next twelve months. Our future capital requirements will depend on many factors including the level of investment we make in new businesses, new products or new technologies. We currently have no agreements or
understandings with respect to any future investments or acquisitions. To the extent that our existing cash resources and future earnings are insufficient to fund our future activities, we may need to obtain additional equity or debt financing.
Additional funds may not be available or, if available, we may not be able to obtain them on favorable terms.

The following is a table
summarizing our significant contractual obligations as of December 31, 2007, consisting of future minimum lease payments under all non-cancelable and operating leases (in thousands):



|                  |  |       |        |                 |   |             |  |             |       |                  |   |       |  |   |    
|----------------- |  | ----- | ------ | --------------- | - | ----------- |  | ----------- | ----- | ---------------- | - | ----- |  | - | ---
|                  |  | Total |        | Less than 1year |   | 1  3 years |  | 3  5 years |       | More than 5years
|Operating leases  |  | $     | 18,651 |                 | $ | 4,811       |  | $           | 8,771 |                  | $ | 4,951 |  | $ | 118
|                  |  |       |        |                 |   |             |  |             |       |                  |   |       |  |   |    
|Total commitments |  | $     | 18,651 |                 | $ | 4,811       |  | $           | 8,771 |                  | $ | 4,951 |  | $ | 118
|                  |  |       |        |                 |   |             |  |             |       |                  |   |       |  |   |    



28



---

We have excluded tax contingencies totaling approximately $2.2 million from the table above as there is a
high degree of uncertainty regarding the timing of future cash outflows and, as a result, we are not able to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

Recent Pronouncements

In September 2006, the
FASB issued SFAS 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In December 2007, the FASB released a proposed FASB Staff Position (FSP
FAS 157-bEffective Date of FASB Statement No. 157) which, if adopted as proposed, would delay the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually). We are currently assessing the impact that SFAS 157 may have on our results of operations and financial position.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159).
SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company has elected
not to adopt SFAS 159.

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

ITEM 7A:    QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK

We provide our services to customers primarily in the United States and, to a lesser extent, in Europe and elsewhere throughout
the world. As a result, our financial results could be affected by factors, such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. All sales are currently denominated in U.S. Dollars or Pound Sterling. A
strengthening of the U.S. Dollar or the Pound Sterling could make our products less competitive in foreign markets. Our interest income is sensitive to changes in the general level of U.S. interest rates. Due to the nature of our cash
equivalents and short-term investments, which are primarily money market funds, we have concluded that there is no material market risk exposure.



29



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ITEM 8:    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CYBERSOURCE CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS

CONTENTS



|                                                        |  |   
|------------------------------------------------------- |  | --
|Report of Independent Registered Public Accounting Firm |  | 31
|                                                        | 
|Consolidated Balance Sheets                             |  | 32
|                                                        | 
|Consolidated Statements of Income                       |  | 33
|                                                        | 
|Consolidated Statements of Stockholders Equity         |  | 34
|                                                        | 
|Consolidated Statements of Cash Flows                   |  | 35
|                                                        | 
|Notes to Consolidated Financial Statements              |  | 36



30



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

CyberSource Corporation

We have audited the accompanying
consolidated balance sheets of CyberSource Corporation as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders equity and cash flows for each of the three years in the period ended
December 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the
financial statements referred to above present fairly, in all material respects, the consolidated financial position of CyberSource Corporation at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Notes 1 and 14 to
the financial statements, CyberSource Corporation changed its method of accounting for share based payments as of January 1, 2006 and its method of accounting for uncertain tax positions as of January 1, 2007.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CyberSource Corporations
internal control over financial reporting as of December 31, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 10, 2008 expressed an unqualified opinion thereon.

/s/    ERNST &
YOUNG LLP

San Jose, California

March 10,
2008



31



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CYBERSOURCE CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)



|                                                                                            |  |              |          |   |      |   |          |  
|------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                                                            |  | December 31, |         
|                                                                                            |  | 2007         |          |   | 2006 |  
|ASSETS                                                                                      |  |              |          |   |      |   |          |  
|Current assets:                                                                             |  |              |          |   |      |   |          |  
|Cash and cash equivalents                                                                   |  | $            | 40,393   |   |      | $ | 21,701   |  
|Short-term investments                                                                      |  |              |         |   |      |   | 33,243   |  
|Trade accounts receivable, net of allowances of $734 and $493 at December 31, 2007 and 2006 |  |              | 15,503   |   |      |   | 9,614    |  
|Prepaid expenses and other current assets                                                   |  |              | 4,189    |   |      |   | 1,823    |  
|Deferred income taxes                                                                       |  |              | 3,596    |   |      |   | 2,320    |  
|                                                                                            |  |              |          |   |      |   |          |  
|Total current assets                                                                        |  |              | 63,681   |   |      |   | 68,701   |  
|Property and equipment, net                                                                 |  |              | 10,664   |   |      |   | 3,618    |  
|Intangible assets, net                                                                      |  |              | 158,316  |   |      |   | 2,845    |  
|Goodwill                                                                                    |  |              | 291,456  |   |      |   |         |  
|Non-current deferred income taxes, net                                                      |  |              | 9,773    |   |      |   | 9,629    |  
|Other non-current assets                                                                    |  |              | 2,341    |   |      |   | 2,250    |  
|Restricted cash                                                                             |  |              | 1,516    |   |      |   |         |  
|                                                                                            |  |              |          |   |      |   |          |  
|Total assets                                                                                |  | $            | 537,747  |   |      | $ | 87,043   |  
|                                                                                            |  |              |          |   |      |   |          |  
|                                                                                            |  |             
|LIABILITIES AND STOCKHOLDERS EQUITY                                                        |  |              |          |   |      |   |          |  
|Current liabilities:                                                                        |  |              |          |   |      |   |          |  
|Accounts payable                                                                            |  | $            | 613      |   |      | $ | 409      |  
|Funds due to merchants                                                                      |  |              | 11,399   |   |      |   |         |  
|Other accrued liabilities                                                                   |  |              | 14,297   |   |      |   | 6,056    |  
|Deferred revenue                                                                            |  |              | 3,772    |   |      |   | 1,950    |  
|Accrued restructuring                                                                       |  |              | 904      |   |      |   |         |  
|                                                                                            |  |              |          |   |      |   |          |  
|Total current liabilities                                                                   |  |              | 30,985   |   |      |   | 8,415    |  
|Deferred revenue, less current portion                                                      |  |              | 493      |   |      |   |         |  
|Accrued restructuring, less current portion                                                 |  |              | 860      |   |      |   |         |  
|Other non-current tax liabilities                                                           |  |              | 2,195    |   |      |   |         |  
|                                                                                            |  |              |          |   |      |   |          |  
|Total liabilities                                                                           |  |              | 34,533   |   |      |   | 8,415    |  
|                                                                                            |  |              |          |   |      |   |          |  
|                                                                                            |  |             
|Commitments and contingencies                                                               |  |              |          |   |      |   |          |  
|                                                                                            |  |             
|Stockholders equity:                                                                       |  |              |          |   |      |   |          |  
|Common stock, $0.001 par value:                                                             |  |              |          |   |      |   |          |  
|Authorized shares125,000,000                                                               |  |              |          |   |      |   |          |  
|Issued and outstanding shares68,682,474 in 2007 and 34,908,894 in 2006                     |  |              | 69       |   |      |   | 35       |  
|Additional paid-in capital                                                                  |  |              | 790,682  |   |      |   | 368,606  |  
|Accumulated other comprehensive loss                                                        |  |              | (5       | ) |      |   | (52      | )
|Accumulated deficit                                                                         |  |              | (287,532 | ) |      |   | (289,961 | )
|                                                                                            |  |              |          |   |      |   |          |  
|Total stockholders equity                                                                  |  |              | 503,214  |   |      |   | 78,628   |  
|                                                                                            |  |              |          |   |      |   |          |  
|Total liabilities and stockholders equity                                                  |  | $            | 537,747  |   |      | $ | 87,043   |  
|                                                                                            |  |              |          |   |      |   |          |  

See accompanying notes.



32



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CYBERSOURCE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)



|                                                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                 |  | Year Ended December 31, |        
|                                                                                 |  | 2007                    |         |   | 2006 |   |        | 2005 | 
|Revenues                                                                         |  | $                       | 116,999 |   |      | $ | 70,250 |      |  | $ | 50,511 |  
|                                                                                 |  |                         |        
|Cost of revenues                                                                 |  |                         | 62,113  |   |      |   | 34,627 |      |  |   | 20,492 |  
|                                                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Gross profit                                                                     |  |                         | 54,886  |   |      |   | 35,623 |      |  |   | 30,019 |  
|Operating expenses:                                                              |  |                         |         |   |      |   |        |      |  |   |        |  
|Product development                                                              |  |                         | 13,397  |   |      |   | 9,283  |      |  |   | 8,000  |  
|Sales and marketing                                                              |  |                         | 25,685  |   |      |   | 14,443 |      |  |   | 11,140 |  
|General and administrative                                                       |  |                         | 14,979  |   |      |   | 9,861  |      |  |   | 6,031  |  
|Restructuring charges                                                            |  |                         | 1,755   |   |      |   |       |      |  |   |       |  
|                                                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Total operating expenses                                                         |  |                         | 55,816  |   |      |   | 33,587 |      |  |   | 25,171 |  
|                                                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Income (loss ) from operations                                                   |  |                         | (930    | ) |      |   | 2,036  |      |  |   | 4,848  |  
|Other income, net                                                                |  |                         | 314     |   |      |   | 341    |      |  |   |       |  
|Interest income                                                                  |  |                         | 2,726   |   |      |   | 2,344  |      |  |   | 1,324  |  
|                                                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Income before taxes                                                              |  |                         | 2,110   |   |      |   | 4,721  |      |  |   | 6,172  |  
|Income tax benefit                                                               |  |                         | (319    | ) |      |   | (9,690 | )    |  |   | (3,074 | )
|                                                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Net income                                                                       |  | $                       | 2,429   |   |      | $ | 14,411 |      |  | $ | 9,246  |  
|                                                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Basic net income per share                                                       |  | $                       | 0.06    |   |      | $ | 0.42   |      |  | $ | 0.28   |  
|                                                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|Diluted net income per share                                                     |  | $                       | 0.06    |   |      | $ | 0.39   |      |  | $ | 0.26   |  
|                                                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|                                                                                 |  |                         |        
|Weighted average number of shares used in computing basic net income per share   |  |                         | 40,736  |   |      |   | 34,623 |      |  |   | 33,464 |  
|                                                                                 |  |                         |         |   |      |   |        |      |  |   |        |  
|                                                                                 |  |                         |        
|Weighted average number of shares used in computing diluted net income per share |  |                         | 43,225  |   |      |   | 36,593 |      |  |   | 35,811 |  
|                                                                                 |  |                         |         |   |      |   |        |      |  |   |        |  

See accompanying notes.



33



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CYBERSOURCE CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(In thousands, except share amounts)



|                                                             |  |              |   |                          |        |    |                                            |   |         |                    |  |   |       |   |  |   |          |   |  |   |         |  
|------------------------------------------------------------ |  | ------------ | - | ------------------------ | ------ | -- | ------------------------------------------ | - | ------- | ------------------ |  | - | ----- | - |  | - | -------- | - |  | - | ------- | -
|                                                             |  | Common Stock |   | AdditionalPaid inCapital |        |    | AccumulatedOtherComprehensiveIncome (Loss) |   |         | AccumulatedDeficit |  |   | Total |  
|                                                             |  | Shares       |   |                          | Amount |    |                                            |   |        
|Balance at December 31, 2004                                 |  | 33,431,290   |   |                          | $      | 33 |                                            | $ | 361,057 |                    |  | $ | 27    |   |  | $ | (313,618 | ) |  | $ | 47,499  |  
|Issuance of common stock under stock option plans            |  | 869,342      |   |                          |        | 1  |                                            |   | 2,586   |                    |  |   |      |   |  |   |         |   |  |   | 2,587   |  
|Issuance of common stock under employee stock purchase plan  |  | 82,389       |   |                          |        |   |                                            |   | 379     |                    |  |   |      |   |  |   |         |   |  |   | 379     |  
|Repurchase of common stock, net                              |  | (443,000     | ) |                          |        |   |                                            |   | (2,405  | )                  |  |   |      |   |  |   |         |   |  |   | (2,405  | )
|Tax benefit from employee stock options                      |  |             |   |                          |        |   |                                            |   | 93      |                    |  |   |      |   |  |   |         |   |  |   | 93      |  
|Unrealized gain on short-term investments                    |  |             |   |                          |        |   |                                            |   |        |                    |  |   | 24    |   |  |   |         |   |  |   | 24      |  
|Foreign currency translation adjustment                      |  |             |   |                          |        |   |                                            |   |        |                    |  |   | (490  | ) |  |   |         |   |  |   | (490    | )
|Net income                                                   |  |             |   |                          |        |   |                                            |   |        |                    |  |   |      |   |  |   | 9,246    |   |  |   | 9,246   |  
|                                                             |  |              |   |                          |        |    |                                            |   |         |                    |  |   |       |   |  |   |          |   |  |   |         |  
|Comprehensive income                                         |  |             |   |                          |        |   |                                            |   |        |                    |  |   |      |   |  |   |         |   |  |   | 8,780   |  
|                                                             |  |              |   |                          |        |    |                                            |   |         |                    |  |   |       |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2005                                 |  | 33,940,021   |   |                          |        | 34 |                                            |   | 361,710 |                    |  |   | (439  | ) |  |   | (304,372 | ) |  |   | 56,933  |  
|Issuance of common stock under stock option plans            |  | 1,221,765    |   |                          |        | 1  |                                            |   | 4,539   |                    |  |   |      |   |  |   |         |   |  |   | 4,540   |  
|Issuance of common stock under employee stock purchase plan  |  | 15,113       |   |                          |        |   |                                            |   | 132     |                    |  |   |      |   |  |   |         |   |  |   | 132     |  
|Repurchase of common stock, net                              |  | (268,005     | ) |                          |        |   |                                            |   | (2,461  | )                  |  |   |      |   |  |   |         |   |  |   | (2,461  | )
|Stock-based compensation                                     |  |             |   |                          |        |   |                                            |   | 4,686   |                    |  |   |      |   |  |   |         |   |  |   | 4,686   |  
|Unrealized gain on short-term investments                    |  |             |   |                          |        |   |                                            |   |        |                    |  |   | 21    |   |  |   |         |   |  |   | 21      |  
|Foreign currency translation adjustment                      |  |             |   |                          |        |   |                                            |   |        |                    |  |   | 366   |   |  |   |         |   |  |   | 366     |  
|Net income                                                   |  |             |   |                          |        |   |                                            |   |        |                    |  |   |      |   |  |   | 14,411   |   |  |   | 14,411  |  
|                                                             |  |              |   |                          |        |    |                                            |   |         |                    |  |   |       |   |  |   |          |   |  |   |         |  
|Comprehensive income                                         |  |             |   |                          |        |   |                                            |   |        |                    |  |   |      |   |  |   |         |   |  |   | 14,798  |  
|                                                             |  |              |   |                          |        |    |                                            |   |         |                    |  |   |       |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2006                                 |  | 34,908,894   |   |                          |        | 35 |                                            |   | 368,606 |                    |  |   | (52   | ) |  |   | (289,961 | ) |  |   | 78,628  |  
|Issuance of common stock under stock option plans            |  | 1,330,898    |   |                          |        | 1  |                                            |   | 6,843   |                    |  |   |      |   |  |   |         |   |  |   | 6,844   |  
|Issuance of common stock under employee stock purchase plan  |  | 7,345        |   |                          |        |   |                                            |   | 84      |                    |  |   |      |   |  |   |         |   |  |   | 84      |  
|Repurchase of common stock, net                              |  | (420,800     | ) |                          |        |   |                                            |   | (5,032  | )                  |  |   |      |   |  |   |         |   |  |   | (5,032  | )
|Issuance of common stock in the acquisition of Authorize.Net |  | 32,856,137   |   |                          |        | 33 |                                            |   | 412,933 |                    |  |   |      |   |  |   |         |   |  |   | 412,966 |  
|Tax benefit from employee stock options                      |  |             |   |                          |        |   |                                            |   | 287     |                    |  |   |      |   |  |   |         |   |  |   | 287     |  
|Stock-based compensation                                     |  |             |   |                          |        |   |                                            |   | 6,961   |                    |  |   |      |   |  |   |         |   |  |   | 6,961   |  
|Unrealized gain on short-term investments                    |  |             |   |                          |        |   |                                            |   |        |                    |  |   | 27    |   |  |   |         |   |  |   | 27      |  
|Foreign currency translation adjustment                      |  |             |   |                          |        |   |                                            |   |        |                    |  |   | 20    |   |  |   |         |   |  |   | 20      |  
|Net income                                                   |  |             |   |                          |        |   |                                            |   |        |                    |  |   |      |   |  |   | 2,429    |   |  |   | 2,429   |  
|                                                             |  |              |   |                          |        |    |                                            |   |         |                    |  |   |       |   |  |   |          |   |  |   |         |  
|Comprehensive income                                         |  |             |   |                          |        |   |                                            |   |        |                    |  |   |      |   |  |   |         |   |  |   | 2,476   |  
|                                                             |  |              |   |                          |        |    |                                            |   |         |                    |  |   |       |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2007                                 |  | 68,682,474   |   |                          | $      | 69 |                                            | $ | 790,682 |                    |  | $ | (5    | ) |  | $ | (287,532 | ) |  | $ | 503,214 |  
|                                                             |  |              |   |                          |        |    |                                            |   |         |                    |  |   |       |   |  |   |          |   |  |   |         |  

See accompanying notes.



34



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CYBERSOURCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                            |  | Year Ended December 31, |        
|                                                                                                            |  | 2007                    |         |   | 2006 |   |         | 2005 | 
|Operating activities:                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income                                                                                                  |  | $                       | 2,429   |   |      | $ | 14,411  |      |  | $ | 9,246   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Depreciation expense                                                                                        |  |                         | 2,360   |   |      |   | 1,430   |      |  |   | 775     |  
|Amortization expense                                                                                        |  |                         | 4,218   |   |      |   | 112     |      |  |   |        |  
|Stock-based compensation                                                                                    |  |                         | 6,961   |   |      |   | 4,686   |      |  |   |        |  
|Income on investment in joint venture                                                                       |  |                         | (180    | ) |      |   | (41     | )    |  |   |        |  
|Deferred income taxes                                                                                       |  |                         | (1,889  | ) |      |   | (9,724  | )    |  |   | (3,192  | )
|Write-off of intangible assets                                                                              |  |                         | 2,710   |   |      |   |        |      |  |   |        |  
|Restructuring related charges                                                                               |  |                         | 191     |   |      |   |        |      |  |   |        |  
|Loss on disposal of property and equipment                                                                  |  |                         | 8       |   |      |   |        |      |  |   |        |  
|Tax benefit from employee stock options                                                                     |  |                         | 287     |   |      |   |        |      |  |   | 93      |  
|Changes in assets and liabilities:                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Increase in accounts receivable                                                                             |  |                         | (1,747  | ) |      |   | (1,022  | )    |  |   | (1,992  | )
|(Increase) decrease in prepaid expenses and other current assets                                            |  |                         | (5,411  | ) |      |   | 1,020   |      |  |   | (722    | )
|(Increase) in other noncurrent assets                                                                       |  |                         | (1,336  | ) |      |   | (1,052  | )    |  |   | (872    | )
|Increase (decrease) in accounts payable                                                                     |  |                         | (411    | ) |      |   | (110    | )    |  |   | 127     |  
|Increase (decrease) in other accrued liabilities                                                            |  |                         | 4,247   |   |      |   | 112     |      |  |   | 395     |  
|Increase in funds due to merchants                                                                          |  |                         | 393     |   |      |   |        |      |  |   |        |  
|Increase in long-term tax liabilities                                                                       |  |                         | 23      |   |      |   |        |      |  |   |        |  
|Increase in deferred revenue                                                                                |  |                         | 962     |   |      |   | 19      |      |  |   | 91      |  
|                                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                                                   |  |                         | 13,815  |   |      |   | 9,841   |      |  |   | 3,949   |  
|                                                                                                            |  |                         |        
|Investing activities:                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|Purchases of property and equipment                                                                         |  |                         | (4,574  | ) |      |   | (2,506  | )    |  |   | (1,571  | )
|Acquisition of BidPay.com                                                                                   |  |                         |        |   |      |   | (1,990  | )    |  |   |        |  
|Cash used in the acquisition of Authorize.Net                                                               |  |                         | (25,734 | ) |      |   |        |      |  |   |        |  
|Purchases of short-term investments                                                                         |  |                         | (61,964 | ) |      |   | (58,842 | )    |  |   | (67,515 | )
|Maturities of short-term investments                                                                        |  |                         | 95,233  |   |      |   | 58,238  |      |  |   | 66,572  |  
|                                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) investing activities                                                         |  |                         | 2,961   |   |      |   | (5,100  | )    |  |   | (2,514  | )
|                                                                                                            |  |                         |        
|Financing activities:                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|Issuance of notes receivable                                                                                |  |                         |        |   |      |   |        |      |  |   | (175    | )
|Proceeds from exercise of stock options and issuance of common stock under the employee stock purchase plan |  |                         | 6,928   |   |      |   | 4,672   |      |  |   | 2,966   |  
|Repurchase of common stock, net                                                                             |  |                         | (5,032  | ) |      |   | (2,461  | )    |  |   | (2,405  | )
|                                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by financing activities                                                                   |  |                         | 1,896   |   |      |   | 2,211   |      |  |   | 386     |  
|                                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Effect of foreign exchange rate changes on cash                                                             |  |                         | 20      |   |      |   | 366     |      |  |   | (490    | )
|                                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Net increase in cash and cash equivalents                                                                   |  |                         | 18,692  |   |      |   | 7,318   |      |  |   | 1,331   |  
|Cash and cash equivalents at beginning of period                                                            |  |                         | 21,701  |   |      |   | 14,383  |      |  |   | 13,052  |  
|                                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of period                                                                  |  | $                       | 40,393  |   |      | $ | 21,701  |      |  | $ | 14,383  |  
|                                                                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                                                            |  |                         |        
|Supplemental disclosure of noncash investing activity:                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|Common stock issued in the acquisition of Authorize.Net                                                     |  | $                       | 412,966 |   |      | $ |        |      |  | $ |        |  
|Supplemental disclosure of cash flow information:                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Taxes paid                                                                                                  |  | $                       | 17      |   |      | $ | 80      |      |  | $ | 7       |  

See accompanying notes.



35



---

CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. | Summary of Significant Accounting Policies
|-- | ------------------------------------------

The Company

CyberSource Corporation (CyberSource or the Company) provides secure electronic payment and risk management
solutions to organizations that process orders for goods and services over the Internet. CyberSources payment solutions allow eCommerce merchants to accept a wide range of online payment options, from credit cards and electronic checks, to
global payment options and emerging payment types. The Companys risk and compliance management tools address complexities common to online merchants such as credit card fraud, online tax requirements and export controls. The Companys
reporting and management tools facilitate the automation of the flow of complex eCommerce processes, such as recurring billing and payment reconciliation. The Company partners with and connects to a large network of payment processors and other
payment service providers to offer merchants a single source solution.

Basis of Presentation

The accompanying consolidated financial statements reflect the financial position and results of operations of the Company and its wholly owned
subsidiaries. All intercompany transactions and balances have been eliminated.

On November 1, 2007, the Company acquired
Authorize.Net Holdings, Inc. (Authorize.Net). The transaction has been accounted for using the purchase method of accounting. The balance sheet as of December 31, 2007 includes the net assets of Authorize.Net and the statement of
operations for the year ended December 31, 2007 includes the results of operations of Authorize.Net for the period from November 1, 2007, the date of acquisition, to December 31, 2007.

Foreign Currency Translation

The financial
statements of the Companys non-U.S. subsidiaries are translated into U.S. Dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation. Assets and liabilities
of the Companys subsidiaries are translated at the rates of exchange at the end of the period. Revenues and expenses are translated using the average exchange rates in effect during the period. Foreign currency translation adjustments are
recorded in other comprehensive income (loss). Gains and losses realized from foreign currency transactions denominated in currencies other than the subsidiarys functional currency were approximately $0.1 million in losses for the year ended
December 31, 2006 and approximately $0.1 million in gains for the year ended December 31, 2007.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Revenue Recognition

The Company derives its revenues primarily from monthly commerce transaction processing fees and global acquiring fees, support service fees and setup fees. The Company recognizes revenue in accordance with SEC Staff
Accounting Bulletin No. 104, Revenue Recognition (SAB 104). SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Determination of criteria (4) is based on managements judgments regarding the collectibility of those
fees.

Transaction revenues are recognized in the period in which the transactions occur. The Company derives a significant portion of its
transaction processing revenues from global acquiring fees charged to merchants for payment processing services. The Companys fees, which are primarily a percentage of the dollar amount of each transaction processed, are based upon the
merchants monthly charge volume and risk profile. In addition, the Company records revenues for miscellaneous services related to global acquiring, such as fees for processing credit card chargebacks. In accordance with Emerging Issues Task
Force 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent (EITF 99-19), the Company recognizes these fees on a gross basis as it is the primary agent in the transaction in the period the merchants transactions are
processed. Related interchange fees paid to card issuing banks and assessments paid to credit card associations are recognized in cost of revenues at that time.

Provisions are provided for sales returns and are based on historical experience and other known factors. For the years ended December 31, 2007, 2006 and 2005, no customer accounted for more than 10% of total
revenues.



36



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CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Segment Information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available that is evaluated by the chief operating decision maker or decision-making group to
make decisions about how to allocate resources and assess performance. The Companys chief operating decision maker is the Chief Executive Officer (CEO). As of December 31, 2007, the Company views its operations as one segment,
commerce transaction services and support and manages the business based on the revenues of this segment.

Cash and Cash Equivalents and Short-Term
Investments

The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or
less to be cash equivalents. As of December 31, 2007 and 2006, cash equivalents consist primarily of investments in money market funds.

Short-term investments are classified as available-for-sale and are carried at fair market value. As of December 31, 2007, the Company had no short-term investments. As of December 31, 2006, short-term investments were primarily
composed of government and corporate bonds with an original maturity greater than three months and less than one year. Also included in short-term investments as of December 31, 2006 were approximately $6.1 million in auction rate securities
with final maturities ranging from 28 to 40 years. Although some maturities may extend beyond one year, these securities are available to be used for current operations and therefore, are classified as short-term investments as all of the
Companys auction rate securities had auction dates within one year of the prior auction date. Cash and cash equivalents and short-term investments consist of the following as of December 31, 2007 and 2006 (in thousands):



|                                                           |  |                                  |        |                      |   |                       |  |   |                                     |   |  |   |       
|---------------------------------------------------------- |  | -------------------------------- | ------ | -------------------- | - | --------------------- |  | - | ----------------------------------- | - |  | - | ------
|                                                           |  | CarryingValue atDecember 31,2007 |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair MarketValue atDecember 31,2007
|Cash and cash equivalents:                                 |  |                                  |        |                      |   |                       |  |   |                                     |   |  |   |       
|Cash                                                       |  | $                                | 31,432 |                      | $ |                      |  | $ |                                    |   |  | $ | 31,432
|Money market funds                                         |  |                                  | 8,961  |                      |   |                      |  |   |                                    |   |  |   | 8,961 
|                                                           |  |                                  |        |                      |   |                       |  |   |                                     |   |  |   |       
|Total cash and cash equivalents and short-term investments |  | $                                | 40,393 |                      | $ |                      |  | $ |                                    |   |  | $ | 40,393
|                                                           |  |                                  |        |                      |   |                       |  |   |                                     |   |  |   |       
|                                                           |  |                                  |        |                     
|                                                           |  | CarryingValue atDecember 31,2006 |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair MarketValue atDecember 31,2006
|Cash and cash equivalents:                                 |  |                                  |        |                      |   |                       |  |   |                                     |   |  |   |       
|Cash                                                       |  | $                                | 5,606  |                      | $ |                      |  | $ |                                    |   |  | $ | 5,606 
|Commercial paper                                           |  |                                  | 1,051  |                      |   |                      |  |   |                                    |   |  |   | 1,051 
|Money market funds                                         |  |                                  | 15,044 |                      |   |                      |  |   |                                    |   |  |   | 15,044
|                                                           |  |                                  |        |                      |   |                       |  |   |                                     |   |  |   |       
|Total cash and cash equivalents                            |  |                                  | 21,701 |                      |   |                      |  |   |                                    |   |  |   | 21,701
|                                                           |  |                                  |        |                      |   |                       |  |   |                                     |   |  |   |       
|Short-term investments:                                    |  |                                  |        |                      |   |                       |  |   |                                     |   |  |   |       
|Municipal bonds                                            |  |                                  | 6,061  |                      |   |                      |  |   |                                    |   |  |   | 6,061 
|Corporate bonds                                            |  |                                  | 2,011  |                      |   | 1                     |  |   |                                    |   |  |   | 2,012 
|U.S. Government and agency securities                      |  |                                  | 2,033  |                      |   |                      |  |   | (1                                  | ) |  |   | 2,032 
|Commercial paper                                           |  |                                  | 23,164 |                      |   |                      |  |   | (26                                 | ) |  |   | 23,138
|                                                           |  |                                  |        |                      |   |                       |  |   |                                     |   |  |   |       
|Total short-term investments                               |  |                                  | 33,269 |                      |   | 1                     |  |   | (27                                 | ) |  |   | 33,243
|                                                           |  |                                  |        |                      |   |                       |  |   |                                     |   |  |   |       
|Total cash and cash equivalents and short-term investments |  | $                                | 54,970 |                      | $ | 1                     |  | $ | (27                                 | ) |  | $ | 54,944
|                                                           |  |                                  |        |                      |   |                       |  |   |                                     |   |  |   |       

There were no net unrealized losses on short-term investments, which represent the difference
between the fair market value and the amortized cost as of December 31, 2007. Net unrealized losses on short-term investments were $26,000 as of December 31, 2006. There were no realized gains or losses from the sale of short-term
investments during fiscal 2007, 2006 or 2005.



37



---

CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Concentration of Credit Risk

Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable.

Cash and cash equivalents and short-term investments are invested in major financial institutions in the United States. Such deposits may
be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Companys investments are financially sound and, accordingly, minimal credit risk exists with respect
to these investments.

The accounts receivable of the Company and its subsidiaries are derived from sales to customers located primarily in
the United States and Europe. The Company performs ongoing credit evaluations of its customers. The Company generally does not require collateral.

An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection. At December 31, 2007 and 2006, no customer accounted for 10% or more of the Companys
accounts receivable balance. At December 31, 2007 and 2006, the percentage of accounts receivable due from foreign customers was 14% and 15%, respectively.

The Company has no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other hedging arrangements.

Property and Equipment

Property and equipment are stated at cost and are depreciated on a
straight-line basis over estimated useful lives of three years to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease terms or the estimated useful lives. Depreciation expense was $2.4 million,
$1.4 million and $0.8 million for the years ended December 31, 2007, 2006 and 2005, respectively.

Property and equipment consist of
the following (in thousands):



|                                               |  |              |        |      |   |       
|---------------------------------------------- |  | ------------ | ------ | ---- | - | ------
|                                               |  | December 31,
|                                               |  | 2007         |        | 2006
|Computer equipment and software                |  | $            | 32,894 |      | $ | 24,930
|Furniture and fixtures                         |  |              | 2,240  |      |   | 2,027 
|Office equipment                               |  |              | 1,041  |      |   | 1,000 
|Leasehold improvements                         |  |              | 3,041  |      |   | 2,793 
|Internally developed software                  |  |              | 861    |      |   |      
|                                               |  |              |        |      |   |       
|                                               |  |              | 40,077 |      |   | 30,750
|Less accumulated depreciation and amortization |  |              | 29,413 |      |   | 27,132
|                                               |  |              |        |      |   |       
|                                               |  | $            | 10,664 |      | $ | 3,618 
|                                               |  |              |        |      |   |       

Product Development

Product development expenditures are charged to operations as incurred. SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires capitalization of
certain software development costs subsequent to the establishment of technological feasibility. Based on the Companys product development process, technological feasibility is established upon the completion of a working model. To date, costs
incurred by the Company between the completion of the working model and the point at which the product is ready for general release have been insignificant. Accordingly, the Company has charged all such costs to product development expense in the
period incurred.

Internal Use Software

The company follows the guidance set forth in Statement of Position No. 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use (SOP 98-1), in accounting for the development of
its on demand use systems. SOP 98-1 requires companies to capitalize qualifying computer software costs which are incurred during the application development stage, and to amortize them over the softwares estimated useful life. The Company
amortizes such costs when the



38



---

CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



systems become operational. As a result of the acquisition of Authorize.Net, the Company acquired approximately $0.8 million of internal use software.
Approximately $0.1 million of this software was operational prior to the acquisition and is being amortized over its remaining useful life. Approximately $0.7 million of this software primarily relates to upgrades and enhancements to the
Authorize.Net proprietary billing system and was not placed in service as of December 31, 2007.

Advertising Expense

The cost of advertising is recorded as an expense when incurred. Advertising costs were approximately $31,000, $54,000 and $10,000 during the years ended
December 31, 2007, 2006 and 2005, respectively.

Accounting for Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based
Payment (SFAS 123R), which the Company adopted as of January 1, 2006 (the Companys first fiscal quarter of 2006), using the modified prospective method. Total stock-based compensation expense recognized in the
consolidated statement of operations for the years ended December 31, 2007 and 2006 was $7.0 and $4.7 million, respectively, before income taxes. Prior to the January 1, 2006 adoption of SFAS 123R, the Company accounted for stock-based
compensation using Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure (SFAS 148). SFAS 148 required disclosure of the effects of an entitys
accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. As permitted under SFAS 148, the Company adopted the disclosure only provisions and
continued to follow the intrinsic value method of accounting for employee stock options in accordance with Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB 25).

The following table shows the effect on net earnings and earnings per share for the year ended December 31, 2005 had compensation cost been
recognized based upon the estimated fair value on the grant date of stock options, and employee stock purchase plan (ESPP) shares, in accordance with SFAS 123R, as amended by SFAS 148 (in thousands, except per share amounts):



|                                                                                                                                  |  |      |        |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | -
|                                                                                                                                  |  | 2005 |       
|Net income, as reported                                                                                                           |  | $    | 9,246  |  
|Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax
effects |  |      | (3,009 | )
|                                                                                                                                  |  |      |        |  
|Pro forma net income                                                                                                              |  | $    | 6,237  |  
|                                                                                                                                  |  |      |        |  
|                                                                                                                                  | 
|Basic net income per share, as reported                                                                                           |  | $    | 0.28   |  
|                                                                                                                                  |  |      |        |  
|Pro forma basic net income per share                                                                                              |  | $    | 0.19   |  
|                                                                                                                                  |  |      |        |  
|Diluted net income per share, as reported                                                                                         |  | $    | 0.26   |  
|                                                                                                                                  |  |      |        |  
|Pro forma diluted net income per share                                                                                            |  | $    | 0.17   |  
|                                                                                                                                  |  |      |        |  

Stock Options

In March 1998, the Company adopted its 1998 Stock Option Plan (the 1998 Option Plan). There are 1,900,000 shares of common stock authorized for issuance under the 1998 Option Plan. The 1998 Option Plan
provides for the issuance of common stock and the granting of options to employees, officers, directors, consultants, independent contractors, and advisors of the Company. The exercise price of a nonqualifying stock option and an incentive stock
option shall not be less than 85% and 100%, respectively, of the fair value of the underlying shares on the date of grant. Options granted under the 1998 Option Plan generally become exercisable over four years at the rate of 25% per year from
the grant date.

In January 1999, the Company adopted its 1999 Stock Option Plan (the 1999 Option Plan). The Company has
reserved a total of 15,500,000 shares of common stock for issuance under the 1999 Option Plan. The provisions of the 1999 Option Plan are similar to those of the 1998 Option Plan.



39



---

CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In October 1999, the Company adopted the 1999 Nonqualified Stock Option Plan (the 1999
Nonqualified Option Plan). The Company has reserved a total of 1,737,500 shares of common stock for issuance under the 1999 Nonqualified Option Plan. The 1999 Nonqualified Option Plan provides for the granting of non-qualified stock options to
employees, consultants and directors. The other provisions of the 1999 Nonqualified Option Plan are similar to those of the 1999 and 1998 Stock Option Plans.

In September 2000, the Company assumed the PaylinX Stock Option Plan as a result of its acquisition of PaylinX Corporation in September 2000. During 2004, the Company retired the unissued shares available for grant.
Options previously granted under this plan that have not yet expired or otherwise become unexercisable continue to be administered under such plan, and any portions that expire or become unexercisable for any reason shall be canceled and be
unavailable for future issuance.

Stock options to purchase the Companys common stock are granted at prices equal to the fair market
value on the date of grant. Options generally vest monthly over a four year period beginning from the date of grant and generally expire six to ten years from the date of grant. Options granted to non-employee directors generally become vested
nine months from the date of grant. Nearly all outstanding stock options are non-qualified stock options. As of December 31, 2007, 21.1 million shares are authorized for issuance under the Companys stock option plans.

A summary of the Companys stock option activity is presented in the following table:



|                                                    |  |            |   |  |                                        |       |                                          |      |                         |   |           
|--------------------------------------------------- |  | ---------- | - |  | -------------------------------------- | ----- | ---------------------------------------- | ---- | ----------------------- | - | ----------
|                                                    |  | Shares     |   |  | Weightedaverageexercise priceper
share |       | Weightedaverageremainingcontractual life |      | Aggregateintrinsicvalue
|Outstanding as of December 31, 2006                 |  | 7,500,916  |   |  |                                        | 7.37  |                                          |      |                         |   |           
|Granted                                             |  | 2,639,354  |   |  |                                        | 11.79 |                                          |      |                         |   |           
|Exercised                                           |  | (1,330,898 | ) |  |                                        | 5.14  |                                          |      |                         |   |           
|                                                    |  |            |   |  |                                        |       |                                          |      |                         |   |           
|Forfeited                                           |  | (320,752   | ) |  |                                        | 11.19 |                                          |      |                         |   |           
|                                                    |  |            |   |  |                                        |       |                                          |      |                         |   |           
|Outstanding as of December 31, 2007                 |  | 8,488,620  |   |  | $                                      | 8.95  |                                          | 4.92 |                         | $ | 78,764,265
|                                                    |  |            |   |  |                                        |       |                                          |      |                         |   |           
|Vested and expected to vest as of December 31, 2007 |  | 7,815,140  |   |  | $                                      | 8.80  |                                          | 4.89 |                         | $ | 73,930,313
|Exercisable as of December 31, 2007                 |  | 4,703,979  |   |  | $                                      | 7.42  |                                          | 4.60 |                         | $ | 52,533,274

The following table summarizes information about options outstanding at December 31, 2007:



|               |              |                             |           |                               |   |                                                  |  |                             |  |                               |  |   |      
|-------------- | ------------ | --------------------------- | --------- | ----------------------------- | - | ------------------------------------------------ |  | --------------------------- |  | ----------------------------- |  | - | -----
|Exercise Price |              | Number ofOptionsOutstanding |           | WeightedAverageExercise Price |   | Weighted AverageRemainingContractual Life(Years) |  | Number ofOptionsExercisable |  | WeightedAverageExercise Price
|$              | 0.05$  4.96 |                             | 1,825,934 |                               | $ | 3.08                                             |  | 4.43                        |  | 1,765,954                     |  | $ | 3.04 
|$              | 4.99$  7.01 |                             | 1,764,282 |                               | $ | 5.97                                             |  | 5.38                        |  | 1,363,256                     |  | $ | 6.02 
|$              | 7.07$10.46  |                             | 2,424,871 |                               | $ | 9.34                                             |  | 4.38                        |  | 862,366                       |  | $ | 8.88 
|$              | 10.53$15.60 |                             | 2,202,783 |                               | $ | 12.93                                            |  | 5.84                        |  | 466,153                       |  | $ | 11.72
|$              | 15.74$64.63 |                             | 270,750   |                               | $ | 31.86                                            |  | 2.47                        |  | 246,250                       |  | $ | 33.44
|               |              |                             |           |                               |   |                                                  |  |                             |  |                               |  |   |      
|               |              |                             | 8,488,620 |                               | $ | 8.95                                             |  |                             |  | 4,703,979                     |  | $ | 7.42 
|               |              |                             |           |                               |   |                                                  |  |                             |  |                               |  |   |      

At December 31, 2006 and 2005, 4,079,790 and 4,020,129 options were exercisable at a weighted
average exercise price of $6.59 and $6.30, respectively.

For stock options granted during 2007, 2006 and 2005, the Company determined the
fair value at the date of grant or purchase using the Black-Scholes option valuation model and the following weighted average assumptions:



|                        |  |                         |  |               |  |      
|----------------------- |  | ----------------------- |  | ------------- |  | -----
|                        |  | Year Ended December 31,
|                        |  | 2007                    |  | 2006          |  | 2005 
|Risk-free interest rate |  | 4.34% - 4.74%           |  | 4.64% - 4.75% |  | 4.37%
|Dividend yield          |  |                        |  |              |  |     
|Volatility              |  | 0.51 - 0.58             |  | 0.58 - 0.64   |  | 0.60 
|Expected life (years)   |  | 3.46                    |  | 2.96          |  | 3.97 



40



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CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The expected life of the options represents the estimated period of time until exercise and is based
on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on historical volatility of the Companys stock
over the expected life of the options. The risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues with an equivalent remaining expected life. The Company has not paid dividends in the past and does not plan to
pay any dividends in the near future. The weighted average fair value of options granted was $5.81, $4.80 and $2.81 per share for options granted during 2007, 2006 and 2005, respectively.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option valuation model. The assumptions used to
calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and the Companys experience. Options granted are valued using the single option valuation approach, and the resulting expense is
recognized on a straight-line basis over the vesting period of the option. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated at the date of grant based on the Companys historical experience
and future expectations. Prior to the adoption of SFAS 123R, the effect of forfeitures on the pro forma expense amounts was recognized as the forfeitures occurred.

As of December 31, 2007, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $18.4 million, which is expected to be recognized over a weighted average
period of approximately 2.8 years. During 2007, 2006 and 2005, the total intrinsic value of stock options exercised was approximately $11.8 million, $6.9 million and $3.5 million, respectively. During 2007, the total cash received from the exercise
of stock options was approximately $6.9 million.

During 2006, the Company granted 100,000 restricted shares at a weighted average grant
date fair value of $10.46. No shares have vested as of December 31, 2007.

Employee Stock Purchase Plan

In June 1999, the Companys Board of Directors and stockholders adopted the 1999 Employee Stock Purchase Plan (ESPP). The Company has
reserved a total of 700,000 shares of common stock for issuance under this plan. In accordance with Section 423 of the Internal Revenue Code, this plan permitted eligible employees to authorize payroll deductions of up to 10% of their base
compensation to purchase shares of the Companys common stock at the lower of 85% of the fair market value of the common stock on the first day of the offering period or the purchase date. In July 2005, the Company amended the ESPP, permitting
eligible employees to authorize payroll deductions of up to 10% of their base compensation to purchase shares of the Companys common stock at 95% of the fair market value of the common stock on the purchase date. As a result of this amendment
and the provisions of SFAS 123R, shares granted under the ESPP are non-compensatory. During the year ended December 31, 2007, the Company issued 7,345 shares of common stock to employees under the terms of the plan. As of December 31,
2007, 139,071 shares remain available for purchase under the plan.

For ESPP shares purchased in 2005, the Company determined the fair
value at the date of purchase using the Black-Scholes option valuation model and weighted average assumptions for volatility of 0.44, expected life of 6 months and risk-free interest rate of 3.50%. The weighted average fair value for shares
purchased under the Companys ESPP was $0.33 per share during 2005.

Long-Lived Assets

Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (SFAS 142) requires that the
Company perform tests for impairment of its goodwill annually and between annual tests in certain circumstances. As of December 31, 2007, the Company had recorded goodwill in connection with its acquisition of Authorize.Net in November 2007,
with a carrying value of approximately $291.5 million. Significant judgments could be required to evaluate goodwill for impairment in the future including the determination of reporting units, estimating future cash flows, determining appropriate
discount rates and other assumptions. The Company will evaluate the goodwill related to the Authorize.Net acquisition on an annual basis as of July 31.

Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144) requires that the Company perform tests for impairment of its
intangible assets subject to amortization annually



41



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CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



and more frequently whenever events or circumstances suggest that its intangible assets may be impaired. As of December 31, 2007, the Company had
recorded intangible assets in connection with its acquisition of Authorize.Net with a carrying value of approximately $158.3 million.

To
evaluate potential impairment, SFAS 142 and SFAS 144 require the Company to assess whether the estimated fair value of its goodwill and intangible assets are greater than their respective carrying value at the time of the test. Accordingly, there
could be significant judgment in determining the fair values attributable to goodwill and intangible assets, including the determination of reporting units, estimating future cash flows, determining appropriate discount rates and other assumptions.

Net Income Per Share

In accordance
with Statement of Financial Accounting Standards No. 128, Earnings Per Share, basic and diluted net income per share has been computed using the weighted average number of shares of common stock outstanding during the period.

Income Taxes

Income taxes are
calculated under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). Under SFAS 109, the liability method is used in accounting for income taxes, which includes
the effects of temporary differences between financial and taxable amounts of assets and liabilities as well as the effects of net operating loss and credit carryforwards to determine deferred tax assets and liabilities. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected to more likely than not be realized. Prior to the fourth quarter of 2005, the Company recorded a full valuation allowance to reserve for the benefit of its deferred tax
assets due to the uncertainty surrounding its ability to realize these assets.

During the fourth quarter of 2005, the Company recorded an
income tax benefit of approximately $3.1 million which included a $3.2 million reduction in the Companys valuation allowance against its deferred tax assets. During the fourth quarter of 2006, the Company recorded an income tax benefit of
approximately $11.0 million which included a $9.9 million reduction in the Companys valuation allowance against its deferred tax assets. During the fourth quarter of 2007, the Company recorded an income tax benefit of approximately $1.1
million which included a $1.0 million reduction in the Companys valuation allowance against its deferred tax assets.

Accumulated Other
Comprehensive Loss

The Companys comprehensive income consists of its net income and other comprehensive income (loss), including
unrealized gains or losses on available for sale securities and foreign currency translation gains or losses.

New Accounting Pronouncements

In September 2006, the FASB issued SFAS 157, Fair Value Measurements (SFAS 157), which defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In December 2007, the FASB released a proposed FASB Staff Position (FSP FAS 157-bEffective Date of FASB Statement No. 157) which, if adopted as proposed, would
delay the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We are currently
assessing the impact that SFAS 157 may have on our results of operations and financial position.

In February 2007, the FASB issued
SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is
effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company has elected not to adopt SFAS 159.

In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations (SFAS 141R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable



42



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CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. SFAS 141R also establishes disclosure
requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after December 15, 2008. The impact of adopting SFAS 141R will be dependent on the future business combinations that the Company may pursue after its effective date.



|2. | Authorize.Net Acquisition
|-- | -------------------------

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

Pursuant to the terms of the merger agreement, each Authorize.Net common share outstanding immediately prior to the consummation
of the merger was converted into the right to receive 1.1611 shares of CyberSource common stock and a pro-rata share of $125 million in cash. We issued approximately 33 million shares of CyberSource common stock and paid approximately $125
million of cash in exchange for all shares of Authorize.Net common stock outstanding immediately prior to the merger. The Company assumed outstanding Authorize.Net options to purchase approximately 800,000 shares of common stock. The total purchase
price was as follows (in thousands):



|                                                 |  |        |        
|------------------------------------------------ |  | ------ | -------
|                                                 |  | Amount
|Cash                                             |  | $      | 125,092
|Fair value of CyberSource common shares issued   |  |        | 411,194
|Fair value of fully vested stock options assumed |  |        | 1,773  
|Acquisition-related costs                        |  |        | 4,742  
|                                                 |  |        |        
|Total                                            |  | $      | 542,801
|                                                 |  |        |        

The fair value of Authorize.Net stock options assumed was determined using a Black-Scholes option
valuation model. The use of the Black-Scholes option valuation model is consistent with our valuation of stock options in accordance with SFAS 123(R).

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



|                            |  |        |         |  
|--------------------------- |  | ------ | ------- | -
|                            |  | Amount |        
|Cash and cash equivalents   |  | $      | 137,154 |  
|Goodwill                    |  |        | 291,456 |  
|Purchased intangible assets |  |        | 162,400 |  
|Other tangible assets       |  |        | 11,357  |  
|Accrued severance costs     |  |        | (29,416 | )
|Funds due to merchants      |  |        | (11,006 | )
|Other liabilities assumed   |  |        | (19,144 | )
|                            |  |        |         |  
|Total                       |  | $      | 542,801 |  
|                            |  |        |         |  

Other tangible assets consist primarily of property and equipment, trade accounts receivable and
prepaid assets. Other liabilities assumed consist primarily of non-current tax liabilities, deferred revenue and accrued liabilities. The amount of goodwill that is expected to be tax deductible is approximately $46.3 million.



43



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CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Intangible assets related to the acquisition of Authorize.Net consist of the following (in
thousands):



|                                             |  |        |         |                                       |   
|-------------------------------------------- |  | ------ | ------- | ------------------------------------- | --
|                                             |  | Amount |         | Weighted-AverageUseful Life(in years)
|Partner contracts and related relationships  |  | $      | 86,100  |                                       | 11
|Merchant contracts and related relationships |  |        | 49,300  |                                       | 4 
|Existing technology                          |  |        | 21,900  |                                       | 5 
|Trade name                                   |  |        | 3,900   |                                       | 2 
|Processor relationships                      |  |        | 1,200   |                                       | 5 
|                                             |  |        |         |                                       |   
|Total                                        |  | $      | 162,400 |                                       |   
|                                             |  |        |         |                                       |   

Partner contracts and related relationships represent Authorize.Nets network of independent
sales organizations and resellers. Merchant contracts and related relationships represent Authorize.Nets underlying merchant agreements and relationships with their installed customer base. Existing technology represents Authorize.Nets
payment gateway platform. Trade name represents Authorize.Nets brand and trademarks. Processor relationships represent Authorize.Nets electronic connectivity with various processing networks which allow their gateway to process
transactions for their merchants.

The value of the partner contracts and related relationships as well as the merchant contracts and
related relationships were derived by considering, among other factors, the expected income and discounted cash flows to be generated from such contracts and relationships. The value of the existing technology was derived by considering, among other
factors, the expected income and discounted cash flows to be generated, taking into account risks related to the characteristics and applications of the technology and assessments of the life cycle state of the technology. The value of the trade
name was derived by considering, among other factors, expected income and discounted cash flows to be generated, also taking into account the expected period in which the company intends to utilize the trade name. The value of the processor
relationships was derived by considering the expected cost that would be incurred to establish and build connections with the processors.

Intangible assets are being amortized over their respective estimated useful lives and have a total weighted average amortization period of approximately 8 years.

The components of acquired intangible assets as of December 31, 2007 are as follows (in thousands):



|                                             |  |       |         |                         |   |       |  |   |        
|-------------------------------------------- |  | ----- | ------- | ----------------------- | - | ----- |  | - | -------
|                                             |  | Gross |         | AccumulatedAmortization |   | Net  
|Partner contracts and related relationships  |  | $     | 86,100  |                         | $ | 18    |  | $ | 86,082 
|Merchant contracts and related relationships |  |       | 49,300  |                         |   | 2,678 |  |   | 46,622 
|Existing technology                          |  |       | 21,900  |                         |   | 1,027 |  |   | 20,873 
|Trade name                                   |  |       | 3,900   |                         |   | 321   |  |   | 3,579  
|Processor relationships                      |  |       | 1,200   |                         |   | 40    |  |   | 1,160  
|                                             |  |       |         |                         |   |       |  |   |        
|Total                                        |  | $     | 162,400 |                         | $ | 4,084 |  | $ | 158,316
|                                             |  |       |         |                         |   |       |  |   |        

The consolidated statement of operations includes revenues and expenses of Authorize.Net for the
period from November 1, 2007, the date of acquisition, to December 31, 2007, including approximately $4.1 million of amortization expense related to the Authorize.Net intangible assets.

Estimated future amortization expense for the intangible assets recorded on the Companys December 31, 2007 balance sheet is as follows (in
thousands):



|           |  |        |        
|---------- |  | ------ | -------
|           |  | Amount
|2008       |  | $      | 28,674 
|2009       |  |        | 26,230 
|2010       |  |        | 21,777 
|2011       |  |        | 18,743 
|2012       |  |        | 12,903 
|Thereafter |  |        | 49,989 
|           |  |        |        
|Total      |  | $      | 158,316
|           |  |        |        



44



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CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As a result of the Companys acquisition of Authorize.Net, the Company acquired certain
restructuring accruals of approximately $1.8 million related to certain facilities that Authorize.Net had exited. Approximately $0.2 million of payments related to these facilities were made prior to December 31, 2007. In December 2007, the
Company also exited certain redundant office space in Marlborough, Massachusetts and recorded a restructuring accrual of approximately $0.1 million which represents future lease obligations, net of projected sublease rental income and approximately
$0.1 million of severance related to terminated employees.

The financial information in the table below summarizes the combined results of
operations of CyberSource and Authorize.Net, on a pro forma basis, as though the companies had been combined as of the beginning of each of the years presented. The unaudited pro forma financial information for fiscal 2007 combines the historical
results of operations of CyberSource for 2007, which include the results of operations of Authorize.Net subsequent to November 1, 2007, and the historical results of operations of Authorize.Net for the ten months ended October 31, 2007.
The unaudited pro forma financial information for 2006 combines the historical results of operations of CyberSource for 2006 with the historical results of operations of Authorize.Net for 2006. The unaudited pro forma results include adjustments to
reflect amortization of intangible assets and stock-based compensation expense.

This information is presented for informational purposes
only and is not indicative of the results of operations that would have been achieved if the acquisition of Authorize.Net had taken place at the beginning of each of the years presented.

The following table summarizes the unaudited pro forma financial information (in thousands, except per-share amounts):



|                                    |  |                         |         |   |      |   |        
|----------------------------------- |  | ----------------------- | ------- | - | ---- | - | -------
|                                    |  | Year Ended December 31,
|                                    |  | 2007                    |         |   | 2006
|Revenues                            |  | $                       | 175,195 |   |      | $ | 127,799
|Net income (loss)                   |  | $                       | (7,992  | ) |      | $ | 17,496 
|Net income (loss) per sharebasic   |  | $                       | (0.12   | ) |      | $ | 0.26   
|Net income (loss) per sharediluted |  | $                       | (0.12   | ) |      | $ | 0.25   



|3. | BidPay.com Acquisition
|-- | ----------------------

In March 2006, the Company
acquired BidPay.com, Inc. (BidPay), a payment service provider for online auctions. The Companys primary reason for the acquisition of BidPay is to expand its services into the payment market for online auctions. The aggregate
purchase price of approximately $3.0 million consisted of cash consideration of approximately $2.0 million, including $0.2 million of acquisition costs, and $1.0 million in deferred taxes related to the difference between the financial and tax basis
of the assets acquired, in exchange for BidPays proprietary technology, its databases, and certain intellectual property rights, including exclusive rights to the BidPay brand.

In accordance with Emerging Issues Task Force 98-3, Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a
Business, the Company determined that it had acquired productive assets as opposed to a business. As a result, no amount of the purchase price was allocated to goodwill. The total purchase price of $3.0 million was allocated based on the fair
values presented below (in thousands):



|                    |  |                  |       |                           |  
|------------------- |  | ---------------- | ----- | ------------------------- | -
|                    |  | Fair MarketValue |       | Straight-lineAmortization
|Technology platform |  | $                | 269   |                           | 3
|Customer list       |  |                  | 269   |                           | 6
|Trade name          |  |                  | 2,419 |                           | 
|                    |  |                  |       |                           |  
|Total               |  | $                | 2,957 |                           |  
|                    |  |                  |       |                           |  

The Company recorded approximately $0.1 million of amortization expense related to the BidPay
intangible assets in each of the years ended December 31, 2007 and 2006.

The pro forma results of operations have not been presented
for the acquisition of BidPay because the effect of this acquisition was not considered material.



45



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CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In December of 2007, the Company announced the closure of BidPay. As a result, the Company recorded a
restructuring charge of approximately $1.8 million in the fourth quarter of 2007. This charge included $1.6 million for the write-off of the remaining intangible assets related to BidPay, net of deferred tax liabilities, $0.1 million of severance
related to terminated employees and $0.1 million for the write-off of property and equipment.



|4. | Balance Sheet Detail
|-- | --------------------

Prepaid expenses and other
current assets consist of the following (in thousands):



|                                                |  |              |       |      |   |      
|----------------------------------------------- |  | ------------ | ----- | ---- | - | -----
|                                                |  | December 31,
|                                                |  | 2007         |       | 2006
|Prepaid expenses                                |  | $            | 2,649 |      | $ | 1,253
|Acquiring receivable                            |  |              | 995   |      |   | 441  
|Other current assets                            |  |              | 545   |      |   | 129  
|                                                |  |              |       |      |   |      
|Total prepaid expenses and other current assets |  | $            | 4,189 |      | $ | 1,823
|                                                |  |              |       |      |   |      

Other non-current assets consist of the following (in thousands):



|                                       |  |              |       |      |   |      
|-------------------------------------- |  | ------------ | ----- | ---- | - | -----
|                                       |  | December 31,
|                                       |  | 2007         |       | 2006
|Prepaid rent                           |  | $            | 1,108 |      | $ | 1,968
|Deposits                               |  |              | 502   |      |   | 225  
|Prepaid expenses, less current portion |  |              | 510   |      |   | 16   
|Other non-current assets               |  |              | 221   |      |   | 41   
|                                       |  |              |       |      |   |      
|Total other noncurrent assets          |  | $            | 2,341 |      | $ | 2,250
|                                       |  |              |       |      |   |      

Prepaid rent represents the difference between the Companys rent expense on a straight-line
basis and its rent payments to date. Prepaid rent will increase if rent payments are higher than the rent expense on a straight-line basis and decrease if rent payments are lower than the rent expense on a straight-line basis.

Other accrued liabilities consist of the following (in thousands):



|                                       |  |              |        |      |   |      
|-------------------------------------- |  | ------------ | ------ | ---- | - | -----
|                                       |  | December 31,
|                                       |  | 2007         |        | 2006
|Employee benefits and related expenses |  | $            | 5,269  |      | $ | 3,167
|Accrued cost of revenues               |  |              | 2,594  |      |   | 1,617
|Accrued reseller residual payments     |  |              | 2,711  |      |   |     
|Other liabilities                      |  |              | 3,723  |      |   | 1,272
|                                       |  |              |        |      |   |      
|Total other accrued liabilities        |  | $            | 14,297 |      | $ | 6,056
|                                       |  |              |        |      |   |      

Accrued reseller residual payments represent commissions due to third party sales agents that have
sold the Companys transaction services.



|5. | Investment in Joint Venture
|-- | ---------------------------

On March 1,
2000, the Company entered into a joint venture agreement with Japanese partners Marubeni Corporation and Trans-Cosmos, Inc. to establish CyberSource K.K. to provide commerce transaction services to the Japanese market. The Company will maintain a
majority controlling interest in CyberSource K.K., subject to certain veto rights granted to the partners, which will expire when CyberSource K.K. achieves at least $2.0 million in quarterly revenue. The joint venture is being accounted for under
the equity method of accounting until the veto rights granted to the partners as described above expire. After such date, in accordance with the joint venture agreement, the Company will consolidate the financial position and results of operations
of CyberSource K.K. As of December 31, 2005, the Company had recognized losses to the extent of its historical



46



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CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



investment. In 2007 and 2006, the Company recognized joint venture income of approximately $0.2 million and $41,000, respectively.



|6. | Accumulated Other Comprehensive Loss
|-- | ------------------------------------

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



|                                                   |  |                        |    |   |      |   |     |  
|-------------------------------------------------- |  | ---------------------- | -- | - | ---- | - | --- | -
|                                                   |  | Year EndedDecember 31, |   
|                                                   |  | 2007                   |    |   | 2006 |  
|Cumulative foreign currency translation adjustment |  | $                      | (5 | ) |      | $ | (25 | )
|Unrealized loss on short-term investments          |  |                        |   |   |      |   | (27 | )
|                                                   |  |                        |    |   |      |   |     |  
|Accumulated other comprehensive loss               |  | $                      | (5 | ) |      | $ | (52 | )
|                                                   |  |                        |    |   |      |   |     |  



|7. | Funds Due to Merchants
|-- | ----------------------

At December 31, 2007,
the Company was holding funds in the amount of $11.4 million due to merchants. The funds are included in cash and cash equivalents and funds due to merchants on the Companys consolidated balance sheet. The Company typically holds certain funds
related to certain electronic check transactions for approximately seven business days; the actual number of days depends on the contractual terms with each merchant. The Company also holds certain funds related to certain credit card and automated
clearing house transactions for approximately two to four business days; the actual number of days depends on the contractual terms with the financial institution through which the transactions are processed.

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



|8. | Commitments
|-- | -----------

The Company leases its primary
facility and certain equipment under noncancelable operating leases. The lease agreement for the Companys primary facility expires in December 2011. Rental expense was approximately $2.2 million, $1.9 million and $1.8 million for the years
ended December 31, 2007, 2006 and 2005, respectively.

Future minimum lease payments under noncancelable operating leases at
December 31, 2007 are as follows (in thousands):



|                         |  |                 |       
|------------------------ |  | --------------- | ------
|Year ending December 31, |  | OperatingLeases
|2008                     |  | $               | 4,811 
|2009                     |  |                 | 4,536 
|2010                     |  |                 | 4,235 
|2011                     |  |                 | 3,889 
|2012                     |  |                 | 1,062 
|2013                     |  |                 | 118   
|                         |  |                 |       
|Total minimum payments   |  | $               | 18,651
|                         |  |                 |       

The total of minimum rentals to be received in the future under noncancelable subleases is
approximately $5.8 million.



|9. | Letter of Credit
|-- | ----------------

At December 31, 2007, the
Company has an unsecured letter of credit in the amount of $1.0 million per the terms of the operating lease related to the Burlington, Massachusetts office facility it acquired through the acquisition of Authorize.Net. The Company also has $1.0
million on deposit with the financial institution that issued the letter of credit to the Company. This amount is classified as restricted cash in the Companys balance sheet.



47



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CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|10. | Stockholders Equity
|--- | --------------------

Preferred Shares

The Company is authorized to issue 5,610,969 shares of preferred stock. The Companys Board of Directors has the ability to
determine the rights and preferences of the preferred stock and can issue the preferred stock without the approval of the holders of the common stock. As of December 31, 2007, there are no shares of preferred stock outstanding.

Common Shares

During 2007, the
Company amended its certificate of incorporation to increase the number of shares of authorized common stock from 50,000,000 to 125,000,000 in connection with the acquisition of Authorize.Net. The holders of common stock are entitled to one vote per
share on all matters to be voted upon by the stockholders of the Company. Subject to the preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors.

The Company has reserved shares of common stock for future issuance at
December 31, 2007 as follows:



|                                                                       |  |           
|---------------------------------------------------------------------- |  | ----------
|1998 and 1999 Stock Option Plans:                                      |  |           
|Options outstanding                                                    |  | 8,488,620 
|Options available for future grants                                    |  | 4,502,089 
|1999 Employee Stock Purchase Planshares available for future purchase |  | 139,071   
|                                                                       |  |           
|                                                                       |  | 13,129,780
|                                                                       |  |           



|11. | Common Stock Repurchase Program
|--- | -------------------------------

On
January 26, 2005, the Board of Directors authorized management to use up to $10.0 million over a twelve-month period beginning at February 1, 2005 to repurchase additional shares of the Companys common stock. During the twelve months
ending January 31, 2006, the Company repurchased 443,000 shares at an average price of $5.43 per share, including repurchase costs. All of the repurchased shares were cancelled and returned to the status of authorized, unissued shares.

On February 7, 2006, the Board of Directors authorized management to use up to $10.0 million over a twelve-month period beginning at
February 10, 2006 to repurchase additional shares of the Companys common stock. During the period beginning February 10, 2006 and ending December 31, 2006, the Company repurchased 268,005 shares at an average price of $9.18 per
share, including repurchase costs. All of the repurchased shares were cancelled and returned to the status of authorized, unissued shares.

On January 24, 2007, the Board of Directors authorized management to use up to $10.0 million over a twelve-month period beginning at January 30, 2007 to repurchase additional shares of the Companys common stock. During the
period beginning January 30, 2007 and ending December 31, 2007, the Company repurchased 420,800 shares at an average price of $11.96 per share, including repurchase costs. All of the repurchased shares were cancelled and returned to the
status of authorized, unissued shares. For the period beginning January 30, 2007 through February 9, 2007, the common stock repurchase program authorized on February 7, 2006 was superseded by the common stock repurchase program
authorized on January 24, 2007.



|12. | Related Party Transactions
|--- | --------------------------

For the years ended
December 31, 2007, 2006 and 2005, legal fees of approximately $1.2 million, $0.4 million and $0.5 million, respectively, were paid to Morrison & Foerster LLP, a law firm in which a director of the Company is a partner. As of
December 31, 2007 and 2006, the Company had immaterial amounts of accounts payable due to Morrison & Foerster LLP.

The terms
of the Companys contracts with the above-related parties are consistent with its contracts with other independent parties.



|13. | Litigation and Contingencies
|--- | ----------------------------

In July and August
2001, various class action lawsuits were filed in the United States District Court, Southern District of New York, against the Company, its Chairman and CEO, a former officer, and four brokerage firms that served as underwriters in



48



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CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



its initial public offering. The actions were filed on behalf of persons who purchased the Companys stock issued pursuant to or traceable to the
initial public offering during the period from June 23, 1999 through December 6, 2000. The action alleges that the Companys underwriters charged secret excessive commissions to certain of their customers in return for
allocations of the Companys stock in the offering. The two individual defendants are alleged to be liable because of their involvement in preparing and signing the registration statement for the offering, which allegedly failed to
disclose the supposedly excessive commissions. On December 7, 2001, an amended complaint was filed in one of the actions to expand the purported class to persons who purchased the Companys stock issued pursuant to or traceable to the
follow-on public offering during the period from November 4, 1999 through December 6, 2000. The lawsuit filed against the Company is one of several hundred lawsuits filed against other companies based on substantially similar
claims. On April 19, 2002, a consolidated amended complaint was filed to consolidate all of the complaints and claims into one case. The consolidated amended complaint alleges claims that are virtually identical to the amended
complaint filed on December 7, 2001 and the original complaints. In October 2002, the claims against the Companys officer and a former officer that were named in the amended complaint were dismissed without prejudice. In July
2002, the Company, along with other issuer defendants in the case, filed a motion to dismiss the consolidated amended complaint with prejudice. On February 19, 2003, the court issued a written decision denying the motion to dismiss with
respect to CyberSource and the individual defendants. On July 2, 2003, a committee of the Companys Board of Directors approved a proposed partial settlement with the plaintiffs in this matter. The settlement would have provided,
among other things, a release of the Company and of the individual defendants for the alleged wrongful conduct in the Amended Complaint in exchange for a guarantee from the Companys insurers regarding recovery from the underwriter defendants
and other consideration from the Company regarding its underwriters. The plaintiffs have continued to litigate against the underwriter defendants. The district court directed that the litigation proceed within a number of focus cases
rather than in all of the 310 cases that have been consolidated. The Companys case is not one of these focus cases. On October 13, 2004, the district court certified the focus cases as class actions. The underwriter defendants appealed
that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit reversed the district courts class certification decision. On April 6, 2007, the Second Circuit denied plaintiffs petition for rehearing. In
light of the Second Circuit opinion, the Company has informed the district court that this settlement cannot be approved because the defined settlement class, like the litigation class, cannot be certified. The Company cannot predict whether the
Company will be able to renegotiate a settlement that complies with the Second Circuits mandate. Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter. However, any direct
financial impact of the proposed settlement is expected to be borne by the Companys insurers.

On August 11, 2004, the Company
filed suit in the Northern District of California against Retail Decisions, Inc. (ReD US) and Retail Decisions Plc (ReD UK) (collectively, ReD), Case No. 3:04-CIV-03268, alleging that ReD infringes the
Companys U.S. Patent No. 6,029,154 (the 154 Patent). The Company served ReD US with the complaint on August 12, 2004, and the Company served ReD UK with the complaint on August 13, 2004. On September 30,
2004, ReD responded to the Companys complaint. ReD filed a motion to stay the case for 90 days pending a determination by the U.S. Patent and Trademark Office (PTO) as to whether it will grant ReDs request that the PTO
re-examine the 154 Patent. ReD also filed a motion for a more definite statement by the Company with respect to its allegation that ReD is willfully infringing the 154 Patent. In addition, ReD UK filed a motion to dismiss the action
against it on the ground that it is not subject to personal jurisdiction in the Northern District of California. On October 27, 2004, ReD filed a request for re-examination with the PTO, based on prior art ReD discovered that allegedly
invalidates the Patent. On October 28, 2004, the Company filed an opposition to ReDs motion to stay the case for 90 days and an opposition to ReDs motion for a more definite statement with respect to willful infringement. Based on
ReD UKs representation that ReD US is the sole entity that develops, operates, and distributes the eBitGuard service, the Company agreed to dismiss ReD UK while reserving the right to reinstitute action against ReD UK in the event the Company
later discovers that ReD UK is subject to the courts personal jurisdiction. In return, ReD UK agreed that if the Company later establishes that personal jurisdiction existed, the Company could re-file against ReD UK in this action without
prejudice to its damages claim. The Company also filed an amended complaint, removing ReD UK as a named defendant and restating the willful infringement claim. On November 16, 2004, the court granted ReDs motion to stay the proceedings
pending the PTOs decision as to whether it will grant ReDs request for re-examination. On December 30, 2004, the PTO granted ReDs request for a re-examination. On January 19, 2005, ReD filed a motion to dismiss the case
without prejudice or to extend the stay until completion of the re-examination process. On January 24, 2005, the court extended the stay pending the re-examination process, vacated ReDs motion to dismiss, and ordered quarterly updates as
to the status of the re-examination process. On April 25, 2005, the parties filed a joint status report that was approved by the court. On June 20, 2005, the PTO issued a preliminary office action rejecting all of the claims of the
154 Patent based on one of the prior art references cited by ReD. On July 14, 2005, the Company met with the PTO examiner handling the re-examination to distinguish the prior art from the claims of the 154 Patent. On August 9,
2006, the PTO issued a final office action rejecting all of the claims of the 154 Patent. On September 7, 2006, the



49



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CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Company filed a response to the office action requesting certain amendments to the claims. On October 10, 2006, the PTO filed a response rejecting the
amendments and extending the Companys deadline to file a notice of appeal. On October 30, 2006, the Company filed a notice of appeal. On December 22, 2006, the Company filed the appeal brief. On May 3, 2007, the PTO issued a
Notice of Intent to Issue Reexam Certificate, reversing its action of August 9, 2006. Accordingly, the patent has been re-validated and the Company expects to receive a new patent certificate shortly. While there can be no
assurances as to the outcome of the lawsuit, the Company does not presently believe that the lawsuit would have a material effect on its financial condition, results of operations, or cash flows.

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



|14. | Income Taxes
|--- | ------------

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



|                    |  |              |       |   |      |   |       |  |   |      
|------------------- |  | ------------ | ----- | - | ---- | - | ----- |  | - | -----
|                    |  | December 31,
|                    |  | 2007         |       |   | 2006 |   | 2005 
|Domestic            |  | $            | (1    | ) |      | $ | 3,421 |  | $ | 4,952
|Foreign             |  |              | 2,111 |   |      |   | 1,300 |  |   | 1,220
|                    |  |              |       |   |      |   |       |  |   |      
|Income before taxes |  | $            | 2,110 |   |      | $ | 4,721 |  | $ | 6,172
|                    |  |              |       |   |      |   |       |  |   |      

The Companys (benefit) for income taxes consists of the following (in thousands):



|                                  |  |              |        |   |      |   |        |      |  |   |        |  
|--------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                  |  | December 31, |       
|                                  |  | 2007         |        |   | 2006 |   |        | 2005 | 
|Current income taxes:             |  |              |        |   |      |   |        |      |  |   |        |  
|Federal                           |  | $            | 319    |   |      | $ | 22     |      |  | $ | 80     |  
|State                             |  |              | 99     |   |      |   | 12     |      |  |   | 38     |  
|                                  |  |              |        |   |      |   |        |      |  |   |        |  
|Total current income tax expense  |  |              | 418    |   |      |   | 34     |      |  |   | 118    |  
|                                  |  |              |        |   |      |   |        |      |  |   |        |  
|Deferred income taxes:            |  |              |        |   |      |   |        |      |  |   |        |  
|Federal                           |  |              | (1,101 | ) |      |   | (7,458 | )    |  |   | (2,285 | )
|State                             |  |              | (301   | ) |      |   | (1,770 | )    |  |   | (403   | )
|Foreign                           |  |              | 665    |   |      |   | (496   | )    |  |   | (504   | )
|                                  |  |              |        |   |      |   |        |      |  |   |        |  
|Total deferred income tax benefit |  |              | (737   | ) |      |   | (9,724 | )    |  |   | (3,192 | )
|                                  |  |              |        |   |      |   |        |      |  |   |        |  
|Total benefit for income taxes    |  | $            | (319   | ) |      | $ | (9,690 | )    |  | $ | (3,074 | )
|                                  |  |              |        |   |      |   |        |      |  |   |        |  

A reconciliation between the tax provision computed at the statutory income tax rate of 35% in
2007 and 34% in 2006 and 2005, and the Companys actual effective income tax provision is as follows (in thousands):



|                                |  |              |      |   |      |   |        |      |  |   |        |  
|------------------------------- |  | ------------ | ---- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                |  | December 31, |     
|                                |  | 2007         |      |   | 2006 |   |        | 2005 | 
|Tax provision at statutory rate |  | $            | 738  |   |      | $ | 1,605  |      |  | $ | 2,098  |  
|State income taxes              |  |              | 113  |   |      |   | (1,160 | )    |  |   | (241   | )
|Other                           |  |              | 16   |   |      |   | 87     |      |  |   | 25     |  
|Foreign operations              |  |              | (218 | ) |      |   | (886   | )    |  |   | (870   | )
|Decrease in valuation allowance |  |              | (968 | ) |      |   | (9,336 | )    |  |   | (4,086 | )
|                                |  |              |      |   |      |   |        |      |  |   |        |  
|Provision for income taxes      |  | $            | (319 | ) |      | $ | (9,690 | )    |  | $ | (3,074 | )
|                                |  |              |      |   |      |   |        |      |  |   |        |  



50



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CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



During 2007, the Company recorded an income tax benefit of approximately $0.3 million. This benefit
included a $1.0 million reduction in the Companys valuation allowance related to a portion of its deferred tax assets that will more likely than not be realized. In addition, as a result of the acquisition of Authorize.Net, the Company
recorded as an adjustment to goodwill a $34.5 million reduction in the valuation allowance related to deferred tax assets established in purchase accounting. During 2006, the Company recorded an income tax benefit of approximately $9.7 million. This
benefit included a $9.9 million reduction in the Companys valuation allowance against its deferred tax assets, all of which was recorded as a benefit to the income tax provision. During 2005, the Company recorded an income tax benefit of
approximately $3.1 million. This benefit included a $3.2 million reduction in the Companys valuation allowance against its deferred tax assets, all of which was recorded as a benefit to the income tax provision. In evaluating its ability to
recover its deferred tax assets, the Company considers all available positive and negative evidence including its past operating results, the existence of cumulative losses and its forecast of future taxable income. In determining future taxable
income, the Company is responsible for assumptions utilized including the amount of state, federal and international per-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning
strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company is using to manage the underlying businesses.

As of December 31, 2007, the Company had federal and state net operating loss carryforwards of approximately $196.3 million and $40.6 million,
respectively. Of these amounts, $15.2 million represent tax deductions from stock option compensation which will be recorded as an adjustment to additional paid-in capital when they reduce taxes payable. If the Company is not able to use them, the
federal and state net operating loss carryforwards will expire in 2013 through 2024. The Tax Reform Act of 1986 imposes substantial restrictions on the utilization of net operating losses and tax credits in the event of a corporations
ownership change, as defined in the Internal Revenue Code. The Companys ability to utilize net operating loss carryforwards may be limited if such an ownership change occurs.

As of December 31, 2007, the Company also has research and development tax credit carryforwards of approximately $3.9 million and $2.2 million for
federal and state income tax purposes, respectively. The federal carryforward will expire at various dates beginning in 2018 through 2027, if not utilized. The state carryforward can be carried forward indefinitely.

The Company has not provided for U.S. federal income and state income taxes on non-U.S. subsidiaries undistributed earnings as of December 31,
2006, because such earnings are intended to be reinvested in the operations and potential acquisitions of its international subsidiaries indefinitely. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be
subject to applicable U.S. federal and state income taxes.

The components of the net deferred tax assets are as follows (in thousands):



|                                          |  |              |         |   |      |   |         |  
|----------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                          |  | December 31, |        
|                                          |  | 2007         |         |   | 2006 |  
|Deferred tax assets:                      |  |              |         |   |      |   |         |  
|Net operating loss carryforwards          |  | $            | 62,606  |   |      | $ | 51,388  |  
|Tax credit carryforwards                  |  |              | 6,011   |   |      |   | 1,816   |  
|Other, net                                |  |              | 4,192   |   |      |   | 1,992   |  
|Depreciation differences                  |  |              | 10,321  |   |      |   | 581     |  
|Non-deductible stock compensation charges |  |              | 4,397   |   |      |   | 1,833   |  
|                                          |  |              |         |   |      |   |         |  
|Deferred tax assets                       |  | $            | 87,527  |   |      | $ | 57,610  |  
|                                          |  |             
|Deferred tax liabilities:                 |  |              |         |   |      |   |         |  
|Acquired intangibles                      |  |              | (63,870 | ) |      |   | (1,151  | )
|                                          |  |              |         |   |      |   |         |  
|Net deferred tax assets                   |  | $            | 23,657  |   |      | $ | 56,459  |  
|Valuation allowance                       |  |              | (10,288 | ) |      |   | (44,510 | )
|                                          |  |              |         |   |      |   |         |  
|Net deferred tax assets                   |  | $            | 13,369  |   |      | $ | 11,949  |  
|                                          |  |              |         |   |      |   |         |  

Under SFAS 109, deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Due to the uncertainty surrounding the realization of the tax
attributes in tax returns, the Company has not



51



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CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



recorded certain deferred tax assets relating to stock option compensation. The valuation allowance decreased approximately $34.2 million from
December 31, 2006 to December 31, 2007.

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). This interpretation clarifies the criteria for recognizing income tax benefits under SFAS 109 and requires additional disclosures about uncertain tax positions. Under FIN
48, the financial statement recognition of the benefit for a tax position is dependent upon the benefit being more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then
measured and recognized at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. Upon adoption of FIN 48 on January 1, 2007, the Company did not recognize any unrecognized tax benefits or
adjustments to the opening balance in retained earnings.

As of December 31, 2007, the Company has provided a $1.8 million liability
representing unrecognized tax benefits relating to various federal and state income tax matters as a result of the acquisition of Authorize.Net which is classified as other non-current tax liabilities in the Companys balance sheet. Of this
amount, the amount that would impact the Companys effective tax rate, if recognized, is $1.5 million. The Company does not expect that the amounts of unrecognized tax benefits will change significantly within the next twelve months.

As of December 31, 2007, the Company has accrued $0.4 million of interest related to uncertain tax positions. The Company accounts
for interest related to uncertain tax positions as part of its provision for federal and state income taxes.

A reconciliation of the
beginning and ending balance of the consolidated liability for unrecognized income tax benefits during the year ended December 31, 2007 is as follows (in thousands):



|                                            |  |        |      
|------------------------------------------- |  | ------ | -----
|                                            |  | Amount
|Balance at January 1, 2007                  |  | $      |     
|Additions for tax positions of prior years  |  |        | 1,787
|Additions for tax positions related to 2007 |  |        |     
|Reductions for tax positions of prior years |  |        |     
|Settlements during 2007                     |  |        |     
|                                            |  |        |      
|Balance at December 31, 2007                |  | $      | 1,787
|                                            |  |        |      

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various
U.S. states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2001. With the exception of tax years 2001 and
2003 for the U.S. federal jurisdiction, all other tax years from 2001 through 2007 remain open to examination by U.S. federal, state and local, or non-U.S. tax jurisdictions.



|15. | Employee Savings and Retirement Plan
|--- | ------------------------------------

The Company
maintains a defined contribution plan under Internal Revenue Service Code 401(k) (the 401(k) Plan). The 401(k) Plan provides for tax deferred salary deductions. Employees can elect to contribute to the 401(k) Plan up to 20% of their
salary, subject to current statutory limits. The Company is not required to contribute to the 401(k) Plan and has made no contributions since the inception of the 401(k) Plan.



52



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CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|16. | Net Income Per Share Computation
|--- | --------------------------------

The following
table reconciles the numerators and denominators of the net income per share calculation for the years ended December 31, 2007, 2006 and 2005 (in thousands, except per share data):



|                                                                               |  |              |        |      |   |        |  |   |       
|------------------------------------------------------------------------------ |  | ------------ | ------ | ---- | - | ------ |  | - | ------
|                                                                               |  | December 31,
|                                                                               |  | 2007         |        | 2006 |   | 2005  
|Basic net income per share computation:                                        |  |              |        |      |   |        |  |   |       
|Net income                                                                     |  | $            | 2,429  |      | $ | 14,411 |  | $ | 9,246 
|                                                                               |  |              |        |      |   |        |  |   |       
|Net income attributable to common stockholders                                 |  | $            | 2,429  |      | $ | 14,411 |  | $ | 9,246 
|                                                                               |  |              |        |      |   |        |  |   |       
|Weighted-average common shares outstanding                                     |  |              | 40,736 |      |   | 34,623 |  |   | 33,464
|                                                                               |  |              |        |      |   |        |  |   |       
|Basic net income per share attributable to common stockholders                 |  | $            | 0.06   |      | $ | 0.42   |  | $ | 0.28  
|                                                                               |  |              |        |      |   |        |  |   |       
|Diluted net income per share computation:                                      |  |              |        |      |   |        |  |   |       
|Net income                                                                     |  | $            | 2,429  |      | $ | 14,411 |  | $ | 9,246 
|                                                                               |  |              |        |      |   |        |  |   |       
|Net income attributable to common stockholders                                 |  | $            | 2,429  |      | $ | 14,411 |  | $ | 9,246 
|                                                                               |  |              |        |      |   |        |  |   |       
|Weighted-average common shares outstanding                                     |  |              | 40,736 |      |   | 34,623 |  |   | 33,464
|Incremental shares attributable to the assumed exercise of outstanding options |  |              | 2,489  |      |   | 1,970  |  |   | 2,347 
|                                                                               |  |              |        |      |   |        |  |   |       
|Total diluted weighted average common shares                                   |  |              | 43,225 |      |   | 36,593 |  |   | 35,811
|                                                                               |  |              |        |      |   |        |  |   |       
|Diluted net income per share attributable to common stockholders               |  | $            | 0.06   |      | $ | 0.39   |  | $ | 0.26  
|                                                                               |  |              |        |      |   |        |  |   |       

Options to purchase approximately 1,039,000, 361,000, and 1,230,000 shares of common stock were
outstanding during 2007, 2006, and 2005, respectively, but were not included in the computation of diluted earnings per share because the effect was antidilutive.



|17. | Guarantees
|--- | ----------

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

The terms of such
obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated.
Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on its balance sheet as of December 31, 2007 or 2006.



53



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CYBERSOURCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|18. | Quarterly Financial Information (Unaudited)
|--- | -------------------------------------------

Summarized quarterly financial information for fiscal 2007 and 2006 is as follows (in thousands, except per share data):



|                             |  |              |        |               |   |              |  |               |        |            |   |        |  |   |        
|---------------------------- |  | ------------ | ------ | ------------- | - | ------------ |  | ------------- | ------ | ---------- | - | ------ |  | - | -------
|                             |  | FirstQuarter |        | SecondQuarter |   | ThirdQuarter |  | FourthQuarter |        | FiscalYear
|Fiscal 2007                  |  |              |        |               |   |              |  |               |        |           
|Revenues                     |  | $            | 22,125 |               | $ | 22,893       |  | $             | 26,546 |            | $ | 45,435 |  | $ | 116,999
|Gross profit                 |  |              | 10,209 |               |   | 10,476       |  |               | 11,489 |            |   | 22,712 |  |   | 54,886 
|Net income                   |  |              | 736    |               |   | 160          |  |               | 347    |            |   | 1,186  |  |   | 2,429  
|Basic net income per share   |  | $            | 0.02   |               | $ |             |  | $             | 0.01   |            | $ | 0.02   |  | $ | 0.06   
|Diluted net income per share |  | $            | 0.02   |               | $ |             |  | $             | 0.01   |            | $ | 0.02   |  | $ | 0.06   
|                             |  |              |        |               |  
|Fiscal 2006                  |  |              |        |               |   |              |  |               |        |           
|Revenues                     |  | $            | 15,584 |               | $ | 16,398       |  | $             | 17,359 |            | $ | 20,909 |  | $ | 70,250 
|Gross profit                 |  |              | 8,439  |               |   | 8,694        |  |               | 8,586  |            |   | 9,904  |  |   | 35,623 
|Net income                   |  |              | 875    |               |   | 790          |  |               | 286    |            |   | 12,460 |  |   | 14,411 
|Basic net income per share   |  | $            | 0.03   |               | $ | 0.02         |  | $             | 0.01   |            | $ | 0.36   |  | $ | 0.42   
|Diluted net income per share |  | $            | 0.02   |               | $ | 0.02         |  | $             | 0.01   |            | $ | 0.34   |  | $ | 0.39   

The fourth quarter fiscal 2007 and 2006 net income includes a reduction in the Companys
deferred tax asset valuation allowance of $1.0 million and $9.9 million, respectively. The fourth quarter fiscal 2007 net income includes restructuring and other non-recurring charges of approximately $1.8 million related to the closure of BidPay.



54



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ITEM 9:    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not Applicable

ITEM 9A:    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the
participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based on this evaluation, the Companys Chief Executive Officer and Chief
Financial Officer concluded that its disclosure controls and procedures are effective in timely alerting them to material information required to be included in this report. It should be noted that the design of any system of controls is based
in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Internal Control Over Financial Reporting

The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d -15(f)) for the Company. Management designed such internal
control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles. The internal controls procedures were designed with the objective of providing reasonable assurance that the Companys transactions are properly
authorized, its assets are safeguarded against unauthorized acquisition, use or disposition and its transactions are properly recorded and reported, all to permit the preparation of the Companys financial statements in conformity with U.S.
generally accepted accounting principles.

As of the end of the period covered by this report, the Companys management carried out an
evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Companys internal controls over financial reporting. In making this assessment, the
Companys management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. In the course of this evaluation, the Company sought to
identify data errors, controls problems or acts of fraud. Our internal controls over financial reporting are evaluated on an ongoing basis by our finance department. The overall goal of these various evaluation activities is to monitor our internal
controls over financial reporting and to make modifications as necessary; our intent in this regard is that the internal controls over financial reporting will be maintained as dynamic systems that change (including improvements and corrections) as
conditions warrant.

Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that its
internal controls over financial reporting are effective. It should be noted that internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations.
Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Because of such limitations, there is a risk that material
misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company acquired
Authorize.Net Holdings, Inc. (Authorize.Net) on November 1, 2007. Management excluded Authorize.Nets internal control over financial reporting from its assessment of the effectiveness of internal control over financial
reporting as of December 31, 2007.

The Companys independent registered public accounting firm, Ernst & Young LLP, has
audited the consolidated financial statements included in this Annual Report on Form 10-K and has issued its report on the effectiveness of our internal control over financial reporting as of December 31, 2007.

Changes in Internal Control Over Financial Reporting

There have been no significant changes in the Companys internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out this evaluation.



55



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

CyberSource Corporation

We have audited CyberSource Corporations internal control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). CyberSource Corporations management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the companys internal control over financial reporting based on our audit.

We conducted
our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As indicated in the accompanying Internal Control Over Financial Reporting, managements assessment of and conclusion on the effectiveness of
internal control over financial reporting did not include the internal controls of Authorize.net Holdings, Inc., which is included in the 2007 consolidated financial statements of CyberSource Corporation and constituted $28.0 million and $10.4
million of total and net assets, respectively, as of December 31, 2007 and $13.2 million of revenues for the year then ended. Our audit of internal control over financial reporting of CyberSource Corporation also did not include an evaluation
of the internal control over financial reporting of Authorize.net Holdings, Inc.

In our opinion, CyberSource Corporation maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of CyberSource Corporation as of December 31, 2007 and 2006, and the related consolidated
statements of income, stockholders equity and cash flows for the three years ended December 31, 2007 of CyberSource Corporation and our report dated March 10, 2008 expressed an unqualified opinion thereon.

/s/    ERNST & YOUNG LLP

San Jose, California

March 10, 2008



56



---

ITEM 9B:    OTHER INFORMATION

None.

PART III

ITEM 10:    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated by reference to the Companys Proxy Statement for the 2008 Annual Meeting of Stockholders.

ITEM 11:    EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the Companys Proxy Statement for the 2008 Annual Meeting of Stockholders.

ITEM 12:    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference to the Companys Proxy Statement for the 2008 Annual Meeting of Stockholders.

ITEM 13:    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference to the Companys Proxy Statement for the 2008 Annual Meeting of Stockholders.

ITEM 14:    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information
required by this item is incorporated by reference to the Companys Proxy Statement for the 2008 Annual Meeting of Stockholders.

ITEM 15:    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



| | (a) | 1. Financial Statements
| | --- | -----------------------

The
following documents are filed as part of this Report:



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|Report of Independent Registered Public Accounting Firm |  | 31  
|Consolidated Balance Sheets                             |  | 32  
|Consolidated Statements of Income                       |  | 33  
|Consolidated Statements of Stockholders Equity         |  | 34  
|Consolidated Statements of Cash Flows                   |  | 35  
|Notes to Consolidated Financial Statements              |  | 36  



| |  | 2. Financial Statement Schedule
| |  | -------------------------------

Schedule
IIValuation and Qualifying Accounts is listed on page 59 of this Annual Report on Form 10-K. All other schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the notes thereto.



| |  | 3. Index to Exhibits
| |  | --------------------

See Index to Exhibits on page
60.



57



---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized,
in Mountain View, California on the 11th day of March, 2008.



CYBERSOURCE CORPORATIONBy:

/s/

WILLIAM S. MCKIERNANWilliam S. McKiernan Chief Executive
Officer


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William S. McKiernan and Steven D. Pellizzer,
and each of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.



|    |  |                        |  |                                                                                            |  |               
|--- |  | ---------------------- |  | ------------------------------------------------------------------------------------------ |  | --------------
|    |  | Signature              |  | Title                                                                                      |  | Date          
|    |  |                        | 
|/s/ |  | WILLIAM S. MCKIERNAN   |  | Chief Executive Officer and Chairman of the Board (Principal Executive Officer)            |  | March 11, 2008
|    |  | William S. McKiernan   |  |                                                                                           
|    |  |                        | 
|/s/ |  | STEVEN D. PELLIZZER    |  | Chief Financial Officer and Senior Vice President of Finance (Principal Financial Officer) |  | March 11, 2008
|    |  | Steven D. Pellizzer    |  |                                                                                           
|    |  |                        | 
|/s/ |  | ROBERT E. DONAHUE      |  | Director                                                                                   |  | March 11, 2008
|    |  | Robert E. Donahue      |  |                                                                                           
|    |  |                        | 
|/s/ |  | JOHN J. MCDONNELL, JR. |  | Director                                                                                   |  | March 11, 2008
|    |  | John J. McDonnell, Jr. |  |                                                                                           
|    |  |                        | 
|/s/ |  | STEVEN P. NOVAK        |  | Director                                                                                   |  | March 11, 2008
|    |  | Steven P. Novak        |  |                                                                                           
|    |  |                        | 
|/s/ |  | RICHARD SCUDELLARI     |  | Director                                                                                   |  | March 11, 2008
|    |  | Richard Scudellari     |  |                                                                                           
|    |  |                        | 
|/s/ |  | KENNETH R. THORNTON    |  | Director                                                                                   |  | March 11, 2008
|    |  | Kenneth R. Thornton    |  |                                                                                           



58



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CYBERSOURCE CORPORATION

SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

December 31, 2005,
2006 and 2007

(In thousands)



|                                |  |                            |     |                                                         |   |                          |  |                       |     |  |   |    
|------------------------------- |  | -------------------------- | --- | ------------------------------------------------------- | - | ------------------------ |  | --------------------- | --- |  | - | ---
|                                |  | Balanceat Beginningof Year |     | Amounts Acquiredor Chargedto Revenue, Costs,or Expenses |   | Write-offs andRecoveries |  | Balance atEnd of Year
|2005                            |  |                            |     |                                                         |   |                          |  |                       |     |  |   |    
|Allowance for Doubtful Accounts |  | $                          | 473 |                                                         | $ | 445                      |  | $                     | 268 |  | $ | 650
|2006                            |  |                            |     |                                                         |   |                          |  |                       |     |  |   |    
|Allowance for Doubtful Accounts |  | $                          | 650 |                                                         | $ | 793                      |  | $                     | 950 |  | $ | 493
|2007                            |  |                            |     |                                                         |   |                          |  |                       |     |  |   |    
|Allowance for Doubtful Accounts |  | $                          | 493 |                                                         | $ | 1,209                    |  | $                     | 968 |  | $ | 734



59



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                               
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Document                                                                                                                                                                                                      
|3.1           |  | Certificate of Incorporation of the Registrant, as amended.                                                                                                                                                   
|3.2(1)        |  | Bylaws of the Registrant, as amended.                                                                                                                                                                         
|3.3(2)        |  | Amendment to the Bylaws.                                                                                                                                                                                      
|3.4(3)        |  | Amendment to the Bylaws.                                                                                                                                                                                      
|3.5(4)        |  | Amendment to the Bylaws                                                                                                                                                                                       
|3.6(5)        |  | Amendment to the Bylaws                                                                                                                                                                                       
|3.7(6)        |  | Amendment to the Bylaws                                                                                                                                                                                       
|4.1           |  | Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.                                                                                                                                                          
|10.1(1)+      |  | Form of Indemnification Agreement between the Registrant and each of its directors and officers.                                                                                                              
|10.2(1)+      |  | 1998 Stock Option Plan.                                                                                                                                                                                       
|10.3(7)+      |  | 1999 Stock Option Plan, as amended                                                                                                                                                                            
|10.4(8)x      |  | Conveyance Agreement dated December 31, 1997 by and between CyberSource Corporation and Internet Commerce Service
Corporation.                                                                                
|10.5(9)x      |  | Amended and Restated Inter-Company Cross License Agreement dated May 19, 1998 by and between Internet Commerce Services Corporation and
software.net Corporation.                                             
|10.6(10)x     |  | Internet Commerce Services Agreement dated April 23, 1998 by and between Internet Commerce Services Corporation and software.net Corporation.                                                                 
|10.7(11)      |  | Amended and Restated Investors Rights Agreement dated October 21, 1998.                                                                                                                                      
|10.8(12)+     |  | 1999 Employee Stock Purchase Plan, as amended.                                                                                                                                                                
|10.9(13)x     |  | CyberSource Internet Commerce Services Agreement dated May 1, 1999 by and between CyberSource Corporation and Beyond.com
Corporation.                                                                         
|10.10(14)+    |  | 1999 Nonqualified Stock Option Plan, as amended.                                                                                                                                                              
|10.11(15)x    |  | Software License Agreement dated June 30, 1999 by and between CyberSource Corporation and Beyond.com Corporation.                                                                                             
|10.12(16)     |  | Lease Agreement dated November 3, 1999 by and between Shoreline Investments V and CyberSource Corporation.                                                                                                    
|10.13(17)     |  | Second Amendment, dated December 30, 2004, to Lease, dated November 3, 1999 by and between Shoreline Investments V and CyberSource
Corporation.                                                               
|10.14(18)     |  | Oral Employment Agreements with Directors and Named Executive Officers                                                                                                                                        
|10.15(19)+    |  | Executive Employment Agreement dated March 31, 2006, by and between CyberSource Corporation and Scott Cruickshank                                                                                             
|10.16(20)     |  | Agreement and Plan of Reorganization dated June 17, 2007, by and between CyberSource Corporation, Congress Acquisition-Sub, Inc., Congress
Acquisition Sub 1 LLC, and Authorize.Net Holdings, Inc.            
|10.17(21)+    |  | Executive Employment Agreement dated June 17, 2007, by and between CyberSource Corporation and Roy Banks.                                                                                                     
|10.18(22)+    |  | Amendment to the 1999 Stock Option Plan.                                                                                                                                                                      
|10.19(23)     |  | Lease dated December 14, 2007, by and between CyberSource Corporation and Pracvest, LC.                                                                                                                       
|23.1          |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                     
|24.1          |  | Power of Attorney. Reference is made to Page 58.                                                                                                                                                              
|31.1          |  | Certification of William S. McKiernan, Chief Executive Officer of the Registrant dated March 11, 2008, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002                                              
|31.2          |  | Certification of Steven D. Pellizzer, Chief Financial Officer of the Registrant dated March 11, 2008, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002                                               
|32.1          |  | Certification of William S. McKiernan, Chief Executive Officer of the Registrant dated March 11, 2008, in accordance with 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|32.2          |  | Certification of Steven D. Pellizzer, Chief Financial Officer of the Registrant dated March 11, 2008, in accordance with 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 



|(1) | Previously filed as an exhibit, bearing the same number, to the Registrants registration statement on Form S-1 (No. 333-77565).
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(2) | Previously filed as exhibit, bearing the same number, to the Registrants registration statement on Form S-1/A (No. 333-77565) filed on June 17, 1999.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Previously filed as exhibit 99.2 to the Registrants Form 8-K filed on August 18, 2005.
|--- | ---------------------------------------------------------------------------------------

|(4) | Previously filed as exhibit 3.5 to the Registrants Form 8-K filed on April 5, 2006.
|--- | ------------------------------------------------------------------------------------

|(5) | Previously filed as exhibit 3.6 to the Registrants Form 8-K filed on April 19, 2006.
|--- | -------------------------------------------------------------------------------------

|(6) | Previously filed as exhibit 3.2 to the Registrants Form 8-K filed on October 31, 2007.
|--- | ---------------------------------------------------------------------------------------

|(7) | Previously filed as exhibit 10.3 to the Registrants Form 10-Q for the quarter ended June 30, 2006.
|--- | ---------------------------------------------------------------------------------------------------

|(8) | Previously filed as exhibit 10.9 to the Registrants registration statement on Form S-1 (No. 333-77545).
|--- | --------------------------------------------------------------------------------------------------------

|(9) | Previously filed as exhibit 10.10 to the Registrants registration statement on Form S-1 (No. 333-77545).
|--- | ---------------------------------------------------------------------------------------------------------

|(10) | Previously filed as exhibit 10.11 to the Registrants registration statement on Form S-1 (No. 333-77545).
|---- | ---------------------------------------------------------------------------------------------------------

|(11) | Previously filed as exhibit 10.12 to the Registrants registration statement on Form S-1 (No. 333-77545).
|---- | ---------------------------------------------------------------------------------------------------------

|(12) | Previously filed as exhibit 10.8 to the Registrants Form 10-Q for the quarter ended June 30, 2006.
|---- | ---------------------------------------------------------------------------------------------------

|(13) | Previously filed as exhibit 10.16 to the Registrants registration statement on Form S-1 (No. 333-89337).
|---- | ---------------------------------------------------------------------------------------------------------

|(14) | Previously filed as exhibit 10.17 to the Registrants registration statement on Form S-1 (No. 333-89337).
|---- | ---------------------------------------------------------------------------------------------------------

|(15) | Previously filed as exhibit 10.18 to the Registrants registration statement on Form S-1 (No. 333-89337).
|---- | ---------------------------------------------------------------------------------------------------------

|(16) | Previously filed as exhibit 10.19 to the Registrants Form 10-K for the year 1999 (No. 000-26477).
|---- | --------------------------------------------------------------------------------------------------

|(17) | Previously filed as an exhibit, bearing the same number, to the Registrants Form 10-K for the year 2004 (No. 000-26477).
|---- | -------------------------------------------------------------------------------------------------------------------------

|(18) | Previously filed in the Registrants Form 8-K filed March 10, 2005.
|---- | -------------------------------------------------------------------

|(19) | Previously filed as exhibit 10.15 to the Registrants Form 10-Q for the quarter ended March 31, 2006.
|---- | -----------------------------------------------------------------------------------------------------

|(20) | Previously filed as exhibit 2.1 to the Registrations Form 8-K filed on June 19, 2007.
|---- | --------------------------------------------------------------------------------------

|(21) | Previously filed as exhibit 99.1 to the Registrations Form 8-K filed on June 22, 2007.
|---- | ---------------------------------------------------------------------------------------

|(22) | Previously filed as exhibit 99.1 to the Registrations Form 8-K filed on October 29, 2007.
|---- | ------------------------------------------------------------------------------------------

|(23) | Previously filed as exhibit 10.1 to the Registrations Form 8-K on December 26, 2007.
|---- | -------------------------------------------------------------------------------------

|x | Confidential treatment granted as to portions of this exhibit.
|- | --------------------------------------------------------------

|+ | Management contract or compensation plan, contract or arrangement.
|- | ------------------------------------------------------------------



60