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Article by DailyStocks_admin    (01-27-09 08:53 AM)

Filed with the SEC from Jan 15 to Jan 21:

Online Resources (ORCC)
ORCC responded to holder Tennenbaum Capital Partners, saying that it will take the holder's suggestions under advisement. Tennenbaum, in a Dec. 23 letter, asked the company to separate the chief executive and chairman positions to "eliminate any possibility of bias or undue influence" in potential merger-and-acquisition opportunities. Tennenbaum also asked the company to "publicly acknowledge" that it can't adopt a shareholder-rights plan, or poison pill, without shareholder approval. Tennenbaum owns 7,447,570 shares (21.9%).

BUSINESS OVERVIEW

Business Overview

Online Resources provides outsourced, web-based financial technology services branded to over 1,900 financial institution, biller, card issuer and creditor clients. With four business lines in two primary vertical markets, we serve over 12 million billable consumer and business end-users. End-users may access and view their accounts online and perform various web-based, self-service functions. They may also make electronic bill payments and funds transfers, utilizing our unique, real-time debit architecture, ACH and other payment methods. Our value-added relationship management services reinforce a favorable user experience and drive a profitable and competitive Internet channel for our clients. Further, we provide professional services, including software solutions, which enable various deployment options, a broad range of customization and other value-added services. Multi-year service contracts with our clients provide us with a recurring and predictable revenue stream that grows with increases in users and transactions. We currently derive approximately 13% of our revenues from account presentation and relationship management, 77% from payments and 10% from professional services, custom software solutions and other revenues.

We provide the following services for two primary vertical markets:


• Banking Services: For more than 1,400 banks, credit unions and other depository financial institutions, we provide a fully integrated suite of web-based account presentation, payment, relationship management and professional services, giving clients a single point of accountability, an enhanced experience for their users, the marketing processes to drive Internet channel adoption, and innovative services that help them maintain their competitive position. We enable business and consumer end-users to consolidate information from multiple accounts and make bill payments to multiple billers or merchants, or virtually anyone, via their financial institution’s web site. We also offer our electronic bill payment services to financial institutions on a stand-alone basis. Many of the bill payment services we offer use our patented payments gateway, which leverages the nation’s real-time electronic funds transfer, also known as EFT, infrastructure. By debiting end-users’ accounts in real-time, we are able to improve the speed, cost and quality of payments, while eliminating the risk that bills will be paid against insufficient funds.

• e-Commerce Services: For more than 400 billers, card issuers, processors, and other creditors, we provide web-based account presentation, payment, relationship management and professional services. We enable consumer and business end-users to manage their account or make a payment to a single card issuer, processor, creditor or biller. Specifically for billers, we provide a full suite of payment options, including consolidation of incoming payments made by credit cards, signature debit cards, ACH and PIN-less debit via multiple access points such as online, interactive voice response, or IVR, and call center customer service representatives. The suite also includes bill presentment, convenience payments, and flexible payment scheduling. We obtained these biller services and the industry’s largest biller network as a result of our acquisitions of Princeton eCom Corporation, which we refer to as Princeton, in July 2006 and Internet Transaction Solutions, Inc., which we refer to as ITS, in August 2007. Specifically for card issuers, processors and creditors, we offer account presentation and self-service capabilities, as well as a web-based tool that improves collections of late and delinquent funds in a private, non-confrontational manner. In addition, for payment acquirers and very large online billers we provide payment services that enable real-time debits for a variety of web-originated consumer payments and fund transfers using our patented EFT payments gateway, which lowers transaction costs and increases the speed and certainty of payments.

We believe our domain expertise fulfills the large and growing need among both smaller financial services providers, who lack the internal resources to build and operate web-based financial services, and larger providers and billers, who choose to outsource niche solutions in order to use their internal resources elsewhere. We also believe that, because our business requires significant infrastructure along with a high degree of flexibility, real-time solutions, and the ability to integrate financial information and transaction processing with a low tolerance for error, there are significant barriers to entry for potential competitors.

We are headquartered in Chantilly, Virginia. We also maintain operations facilities in Princeton, New Jersey, Parsippany, New Jersey, Woodland Hills, California, Columbus, Ohio and Pleasanton, California and an additional data center facility in Newark, New Jersey. We were incorporated in Delaware in 1989.

Our Industry

The Internet continues to grow in importance as an account presentation and payments channel for consumers and businesses, driven in part by the 24 hours a day, seven days a week access to financial services that it makes available. Offering services through this channel allows financial services providers and billers to enhance their competitive positions and gain market share by retaining their existing end-users, aggressively attracting new ones and expanding the end-user relationship. As referenced in its April 2007 report, US Online Banking: Five Year Forecast , Forrester Research, a technology research and advisory firm, supported this growth proposition for the bank and credit union market when it estimated that the number of U.S. households banking online will grow from 52.5 million in 2007 to 71.7 million in 2011. Further, Forrester Research predicts that 59.4 million households will pay bills online in 2011, up from 42.3 million at the end of 2007, according to its May 2007 report, US EBPP Forecast: 2006 To 2011 .

Financial services providers also are increasing access to their services through the Internet in order to increase profitability. The advantages provided by a web-based channel include the opportunity to offer financial services to targeted audiences while reducing or eliminating workload, paper and other back office expenses associated with traditional distribution channels. The Boston Consulting Group, a financial research and advisory firm, conducted a study in 2003 of the depository financial institution market. It concluded that online bill payment customers of depository financial institutions were up to 40 percent more profitable at the end of a 12-month period compared to those customers who did not pay bills online, because the online bill payment customers:


• generate significantly higher revenues than offline customers by using more banking products and services and maintaining higher account balances;

• cost less to serve because online users tend to utilize more self-service functions and therefore interact with the more costly retail branch and call center service channels less frequently than offline customers; and

• are less likely to move their accounts to other financial institutions than offline customers.

This further supported the conclusions published in Bank of America’s 2002 control group study, in which it reported that online bill payers were 31% more profitable for the bank than non-bill payers. Bank of America also concluded that online bill payers were less likely to move their accounts to other banks. Consequently, Bank of America and many other large financial institutions have eliminated their monthly end-user fees for online bill payment and launched aggressive marketing campaigns to promote adoption of the online channel. A growing majority of smaller financial institutions have also eliminated online bill payment fees and responded with similar marketing campaigns. This represents a positive trend for us because the elimination of online bill payment fees has generated significant increase in end-user adoption, more than offsetting any volume pricing discounts we may extend to our clients.

The largest U.S. financial services providers typically develop and maintain their own hosted solution for the delivery of web-based financial services and outsource only niche services. By contrast, the majority of small to mid-sized providers, including the approximately 17,000 banks and credit unions in the U.S. with assets of less than $20 billion, prefer to outsource their web-based financial services initiatives to a technology services provider. These smaller providers understand that they need to provide an increasing level of web-based services, but frequently lack the capital, expertise, or information technology resources to develop and maintain these services in-house.

Many of the factors driving the outsourcing of web-based financial services in the depository financial institution market are also driving the outsourcing of similar services in the credit card issuer and processor market. For example, credit card issuers are reducing operating costs while increasing cardholder loyalty as a greater number of cardholders use the web to manage their credit card accounts. A market research firm, comScore, reported in its August 2007 report, Online Credit Card Report that 69% of consumers who use the Internet now manage one or more of their credit card accounts online.

In the biller market, use of the web channel is being driven primarily by the high cost of processing paper bills and checks. According to the Federal Reserve, an estimated 33.1 billion paper checks were written in the United States in 2006 down from an estimated 37.6 billion in 2003. Approximately 60% of major billers today present electronic bills and an additional 30% of major billers have plans to do so, according to Tower Group, a financial services research advisory firm. Of an estimated 15.1 billion consumer bill payments that occurred in 2006, 32% were paid electronically compared to 23% in 2004 according to the US Postal Service. We believe increased consumer access to the Internet, and the continued cost to both the biller and the consumer of processing paper bills and checks, will continue to drive billers toward use of the web channel to provide and manage their payments.

The majority of financial services providers and billers that offer varying degrees of web-based services continue to consider technology to further improve operations and overall results, however new obstacles created by adopting technology, include:


• managing multiple technology vendors to provide account presentation, payments and other services;

• reconciling multiple payment methods and sources in increasingly shortened timeframes;

• understanding how to evaluate and enhance channel profitability; and

• maximizing the value of the channel by increasing adoption.

As a technology services provider, we assist our clients in meeting these challenges by delivering outsourced account presentation, payments, relationship management and professional solutions.

Our Solution

In contrast to financial technology providers with narrower service sets, who must link with others to provide a full web-channel offering, we are the only single provider of vertically, and increasingly horizontally, integrated, proprietary account presentation, payments, relationship management and custom software services that enable our clients to maintain a competitive and profitable web-based channel. As an outsourcer, we provide economies of scale and technical expertise to our clients that may lack the resources to compete in the dynamic and complex financial services industry, or lack the ability to manage the growing payment vehicles and delivery methods enabled by the web channel. We believe our services provide our clients with a cost-effective means to retain and expand their end-user base, deliver and manage their services more efficiently and strengthen their end-user relationships, while competing successfully against offerings from other financial services providers and businesses. Our services are provided through the following:

Our Technology Infrastructure. We connect to our clients, their core processors, their end-users and other financial services providers through our integrated communications, systems, processing and support capabilities. For our account presentation services, we employ both real-time and batch communications and processing to ensure reliable delivery of current financial information to end-users. For our payment services we use our patented process to ensure real-time funds availability and process payments through a real-time EFT gateway. This gateway consists of over 50 certified links to ATM networks and core processors, which in turn have real-time links to virtually all of the nation’s consumer checking accounts. These key links were established on a one-by-one basis throughout our history and enable us to access end-user accounts to draw funds and pay bills as requested. This gateway infrastructure has improved the cost, speed and quality of our bill payment services for the banking and credit union community and we believe differentiates us from others in the marketplace. We believe this infrastructure is difficult to replicate and creates a significant barrier to entry for potential payment services competitors. In addition, we incorporate ACH and other payment methods in our services.

Our Operating and Technical Expertise. After more than a decade of continuous operating experience, we have established the processes, procedures, controls and staff necessary to provide our clients secure, reliable services. Further, this experience, coupled with our scale and industry focus, allows us to invest efficiently in new product development on our clients’ behalf. We add value to our clients by relieving them of research and development costs required to provide highly competitive web-based services.

Our Integrated Marketing Process. With our relationship management services, we use a unique integrated consumer management process that combines data, technology and multiple consumer contact points to activate, support and sell new services to our clients’ consumer and business end-users. This proprietary process not only provides, in our opinion, a superior end-user experience, it also creates new revenue channels for our clients’ products and services, including the ones we offer. This enables us to increase adoption rates of our services. Using this process, we are able to sell multiple products to consumers, which ultimately can create more profits for our clients. For example, the success of our proprietary process is evident in our ability to add bill payments services, offered through our banking clients to users of our account presentation services, at approximately twice the estimated average industry rate.

Our Professional and Support Services. We provide professional services and custom software solutions that enable us to offer clients various deployment options and value-added web modules that require a high level of customization, such as account opening or lending. In addition, our clients can purchase one or more of a comprehensive set of support services to complement our account presentation, payments, relationship management and professional services. These services include our web site design and hosting, training, information reporting and analysis, and other professional services.

Our Strategy

Our objective is to become the leading supplier of outsourced account presentation and payments services to banks and credit unions, billers and payment acquirers, and credit card issuers and processors. Our strategy for achieving our objectives is to:

Continue to Grow Our Client Bases. Our clients have traditionally been regional and community-based depository financial institutions with assets of under $10 billion. These small to mid-sized financial services providers are compelled to keep pace with the service and technology standards set by larger financial services providers in order to stay competitive, but often lack the capital and human resources needed to develop and manage the technology infrastructure required to provide web-based services. With our July 2006 acquisition of Princeton and our August 2007 acquisition of ITS, we obtained the industry’s largest network of billers who use us to provide payments and manage their complex payments mix, along with relationships with larger depository financial institutions. With our June 2005 acquisition of Integrated Data Systems, Inc., which we refer to as IDS, we obtained relationships with larger depository financial institutions along with the highly customizable applications and professional services expertise to support expansion in this market sector. With our December 2004 acquisition of Incurrent Solutions, Inc., which we refer to as Incurrent, we entered the credit card market, servicing mid-sized credit card issuers, processors for smaller issuers and large issuers who use us to service one or more of their niche portfolios. In addition, we believe that our depository and credit card financial services providers and our biller clients can benefit from our flexible, cost-effective, and broadly networked technology, and we intend to continue to market and sell our services to those providers under long-term recurring revenue contracts.

Increase Adoption Rates. Our clients typically pay us either usage or license fees based on their number of end-users or volume of transactions. Registered end-users using account presentation and payments services are the major drivers of our recurring revenues. Using our proprietary marketing processes, we will continue to assist our clients in growing the adoption rates for our services.

As Princeton and ITS did not provide relationship management services prior to the acquisition, we plan to introduce our consumer marketing and customer care services to billers to help increase adoption and usage of their online payment services.

Provide Additional Products and Services to Our Installed Client Base. We intend to continue to leverage our installed client base by expanding the range of new products and services available to our clients through internal development, partnerships and alliances. For example, in the credit card market, we have introduced a collections support product, developed by us, that allows credit card issuers to direct past due end-users to a website where they can set up payment plans and schedule payments.

Our acquisition of Princeton and ITS have created numerous opportunities to cross-sell their services to our banking and e-commerce services client bases. For example, our biller clients can benefit from the relationship management services we have traditionally offered to financial institutions to help drive consumer adoption and use of their payment services, that could result in an increase in transactions and enhanced customer relationships. Another example is that billers may benefit from offering our web-based collections tool that is currently used by our card issuer clients.

Maintain and Leverage Technological Leadership. We have a history of introducing innovative web-based financial services products for our clients. For example, we developed and currently obtain real-time funds through a patented EFT gateway with over 50 certified links to ATM networks and core processors. We were awarded additional patents covering the confidential use of payment information for targeted marketing that is integrated into our proprietary marketing processes. Our technology and integration expertise has further enabled us to be among the first to adopt an outsourced web-based account presentation capability, and we pioneered the integration of real-time payments and relationship marketing. Further, we have received recognition for innovation and excellence for specific products.

We believe the scope and integration of our technology-based services give us a competitive advantage and we intend to continue the investments necessary to maintain our technological leadership.

Pursue Strategic Acquisitions. To complement and accelerate our internal growth, we continue to explore acquisitions of businesses and products that will complement our existing institutional client offerings, extend our target markets and expand our client base.

Leverage Growth Over Our Relatively Fixed Cost Base. Our business model is highly scaleable. We have invested heavily in our processes and infrastructure and, as such, can add large numbers of clients and end-users without significant cost increases. We expect that, as our revenues grow, and we begin to encounter the price pressures inherent to a maturing market, our cost structure will allow us to maintain or expand our operating margins.

MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW

We provide outsourced, web-based financial technology services branded to over 1,900 financial institution, biller, card issuer and creditor clients. With four business lines in two primary vertical markets, we serve over 12 million billable consumer and business end-users. End-users may access and view their accounts online and perform various web-based self-service functions. They may also make electronic bill payments and funds transfers, utilizing our unique, real-time debit architecture, ACH and other payment methods. Our value-added relationship management services reinforce a favorable user experience and drive a profitable and competitive Internet channel for our clients. Further, we have professional services, including software solutions, which enable various deployment options, a broad range of customization and other value-added services. We currently operate in two business segments — Banking and eCommerce. The operating results of the business segments exclude general corporate overhead expenses and intangible asset amortization.

Registered end-users using account presentation, bill payment or both, and the payment transactions executed by those end-users are the major drivers of our revenues. Since December 31, 2006, the number of users of our account presentation services increased 27%, and the number of users of our payment services increased 46%, for an overall 39% increase in users. For the year ended December 31, 2007, the number of payment transactions completed by banking and biller end-users increased by 74% over the prior year. The large increase in payment services users is the result of the ITS acquisition, which occurred in August 2007. The large increase in payment transactions is the result of the Princeton acquisition, which occurred in July 2006, in addition to the ITS acquisition. Exclusive of the users and payment transactions brought to us by the Princeton and ITS acquisitions, users increased by 29% and payment transactions increased by 15% for the year ended December 31, 2007 compared to the prior year.

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

As a network-based service provider, we have made substantial up-front investments in infrastructure, particularly for our proprietary systems. While we continue to incur ongoing development and maintenance costs, we believe the infrastructure we have built provides us with significant operating leverage. We continue to automate processes and develop applications that allow us to make only small increases in labor and other operating costs relative to increases in customers and transactions. We believe our financial and operating performance will be based primarily on our ability to leverage additional end-users and transactions over this relatively fixed cost base.

Critical Accounting Policies and Estimates

The policies discussed below are considered by management to be critical to an understanding of our consolidated financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment.

Revenue Recognition Policy. We generate revenues from service fees, professional services and other supporting services as a financial technology services provider in the Banking and eCommerce markets.

Service fee revenues are generally comprised of account presentation services, payment services and relationship management services. Many of our contracts contain monthly user fees, transaction fees and new user registration fees for the account presentation services, payment services and relationship management services we offer that are often subject to monthly minimums, all of which are classified as service fees, for account presentation, payment, relationship management and professional services, in our consolidated statements of operations. Additionally, some contracts contain fees for relationship management marketing programs which are also classified as service fees in the Company’s consolidated statements of operations. These services are not considered separate deliverables pursuant to Emerging Issues Task Force (“EITF”) No. 00-21 Revenue Arrangements with Multiple Deliverables (“EITF No. 00-21”). Fees for relationship management marketing programs, monthly user and transaction fees, including the monthly minimums, are recognized in the month in which the services are provided or, in the case of minimums, in the month to which the minimum applies. We recognize revenues from service fees in accordance with Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition in Financial Statements (“SAB No. 104”), which requires that revenues generally are realized or realizable and earned when all of the following criteria are met: a) persuasive evidence of an arrangement exists; b) delivery has occurred or services have been rendered; c) the seller’s price to the buyer is fixed or determinable; and d) collectibility is reasonably assured. Revenues associated with services that are subject to refund are not recognized until such time as the exposure to potential refund has lapsed.

We collect funds from end-users and aggregate them in clearing accounts, which are not included in our consolidated balance sheets, as we do not have ownership of these funds. For certain transactions, funds may remain in the clearing accounts until a payment check is deposited or other payment transmission is accepted by the receiving merchant. We earn interest on these funds for the period they remain in the clearing accounts. The collection of interest on these clearing accounts is considered in our determination of the fee structure for clients and represents a portion of the payment for our services. This interest totaled $10.3 million, $6.4 million and $1.8 million for the years ended December 31, 2007, 2006 and 2005, respectively and is classified as presentation service revenue in our consolidated statements of operations.

Professional services revenues consist of implementation fees associated with the linking of our financial institution clients to our service platforms through various networks, along with web development and hosting fees, training fees, communication services and sales of software licenses and related support. When we provide access to our service platforms to the customer using a hosting model, revenues are recognized in accordance with SAB No. 104. The implementation and web hosting services are not considered separate deliverables pursuant to EITF No. 00-21. Revenues from web development, web hosting, training and communications services are recognized over the term of the contract as the services are provided.

We changed the application of our accounting policy on recognizing revenues for implementation and new user registration fees in the third quarter of 2007. Historically, these fees were deferred and recognized as revenues on a straight-line basis over the period from the date that implementation and new user registration work concludes through the end of the contract. In accordance with EITF No. 00-21, these fees should be considered a single unit of accounting with the service fees associated with the contract. As such, implementation and new user registration fees are recognized consistently when service fees are recorded, on a proportionate performance basis. These fees are included in our revenues from relationship management services and professional services and other. We assessed the cumulative impact of this change in accounting policy and determined that the change is not material to the consolidated financial statements as of and for the year ended December 31, 2007 or any prior period. See Note 2, Summary of Significant Accounting Policies , in the Notes to the Consolidated Financial Statements contained in Part II, Item 8, of this Annual Report on Form 10-K for additional information regarding the change in the application of accounting policy.

When we provide services to the customer through the delivery of software, revenues from the sale of software licenses, services and related support are recognized according to Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition (“SOP 97-2”) as amended by SOP No. 98-9, Software Revenue Recognition With Respect to Certain Transactions (“SOP No. 98-9”). In accordance with the provisions of SOP No. 97-2, revenues from sales of software licenses are recognized when there is persuasive evidence that an arrangement exists, the fee is fixed or determinable, collectibility is probable and the software has been delivered, provided that no significant obligations remain under the contract. We have multiple-element software arrangements that typically include support services, in addition to the delivery of software. For these arrangements, we recognize revenues using the residual method. Under the residual method, the fair value of the undelivered elements, based on vendor specific objective evidence of fair value, is deferred. The difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenues related to the delivered elements. We determine the fair value of the undelivered elements based on the amounts charged when those elements are sold separately. For sales of software that require significant production, modification or customization, pursuant to SOP No. 97-2, we apply the provisions of Accounting Research Bulletin (“ARB”) No. 45, Long-Term Construction-Type Contracts (“ARB No. 45”), and SOP No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (“SOP 81-1”), and recognize revenues related to software license fees and related services using the percentage-of-completion method. The percentage-of-completion is measured based on the percentage of labor effort incurred to date to estimated total labor effort to complete delivery of the software license. Changes in estimates to complete and revisions in overall profit estimates on these contracts are charged to our consolidated statements of operations in the period in which they are determined. We record any estimated losses on contracts immediately upon determination. Revenues related to support services are recognized on a straight-line basis over the term of the support agreement.

Other revenues consist of service fees related to enhanced third-party solutions and termination fees. Service fees for enhanced third-party solutions include fully integrated bill payment and account retrieval services through Intuit’s Quicken, check ordering, inter-institution funds transfer, account aggregation and check imaging. Revenues from these service fees are recognized over the term of the contract as the services are provided. Termination fees are recognized upon termination of a contract.

Allowance for Doubtful Accounts. The provision for losses on accounts receivable and allowance for doubtful accounts are recognized based on our estimate, which considers our historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data and financial health of specific customers. During the year ended December 31, 2007, we wrote-off $6,000 of accounts receivable against the allowance for doubtful accounts and reduced the allowance by an additional $58,000 based on judgment related to projected data to reflect a balance of $84,000 at year end. This represents management’s estimate of the probable losses in the accounts receivable balance at December 31, 2007. While the allowance for doubtful accounts and the provision for losses on accounts receivable depend to a large degree on future conditions, management does not forecast significant adverse developments in 2008.

Income Taxes. Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and the tax bases of assets and liabilities. Deferred tax assets are also recognized for tax net operating loss carryforwards. These deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when such amounts are expected to reverse or be utilized. The realization of deferred tax assets is contingent upon the generation of future taxable income during the carryforward period. Valuation allowances are provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized. Management believes that the Company will generate sufficient taxable income over the next five years to recover the $133.4 million net operating loss carryforwards. The net operating loss carryforwards expire from 2012-2026, therefore, management believes that it is more likely than not that they will recover net operating losses prior to their expiration.

Prior to December 31, 2005, we maintained a full valuation allowance on the deferred tax asset resulting primarily from our net operating loss carryforwards, since the likelihood of the realization of that asset had not become “more likely than not” as of those balance sheet dates. At December 31, 2005, we determined that our recent experience generating taxable income balanced against our history of losses, along with our projection of future taxable income, constituted significant positive evidence for partial realization of the deferred tax asset and, therefore, partial release of the valuation allowance against that asset. Therefore, in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”), we released a portion of our valuation allowance of $36 million creating a $13.7 million deferred tax asset as of December 31, 2005 and a $13.5 million benefit to our earnings for the year ended December 31, 2005.

During 2006 and 2007 we continued to generate taxable income. As a result of this positive earnings trend and projected taxable income over the next five years, the Company reversed $29.4 million which represents substantially all of our valuation allowance, except for $5.9 million needed against state net operating loss carryforwards. This reversal resulted in recognition of an income tax benefit totaling $13.7 million. The remaining $15.7 million was related to valuation allowances accrued in purchase accounting and therefore did not benefit earnings when reversed. In addition, the Company reversed $31.1 million of its gross deferred tax asset valuation allowance after electing to waive Princeton net operating losses that were deemed not realizable. The Company also reversed $1.9 million due to a balance sheet reclassification. Our estimates of future taxable income represent critical accounting estimates because such estimates are subject to change and a downward adjustment could have a significant impact on future earnings.

The Internal Revenue Code limits the utilization of net operating losses when ownership changes occur, as defined by Section 382 of the code. Based on our analysis, a sufficient amount of net operating losses are available to offset our taxable income for the year ended December 31, 2007.

Cost of Internal Use Software and Computer Software to be Sold. We capitalize the cost of computer software developed or obtained for internal use in accordance with SOP No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (“SOP No. 98-1”). Capitalized computer software costs consist primarily of payroll-related and consulting costs incurred during the development stage. We expense costs related to preliminary project assessments, research and development, re-engineering, training and application maintenance as they are incurred. Capitalized software costs are being depreciated on a straight-line basis over an estimated useful life of three years upon being placed in service.

We capitalize the cost of computer software to be sold according to SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed (“SFAS No. 86”). Software development costs are capitalized beginning when a product’s technological feasibility has been established by completion of a working model of the product and ending when a product is ready for general release to customers.

Impairment of Goodwill, Intangible Assets and Long-Lived Assets. We evaluate the recoverability of our identifiable intangible assets, goodwill and other long-lived assets in accordance with SFAS No. 142 and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). Under these provisions, we assess the recoverability of these types of assets at least annually and when events or circumstances indicate a potential impairment. We use the fair value method to assess the recoverability of our goodwill within our two reporting units, Banking and eCommerce. We use the undiscounted cash flows method, when needed, to assess the recoverability of our identifiable intangible assets and other long-lived assets and the discounted cash flows method, at least annually, to assess the recoverability of our goodwill. We did not incur any impairment charges for the years ended December 31, 2007, 2006 or 2005. Future impairment assessments could result in impairment charges that would reduce the carrying values of these assets.

Theoretical Swap Derivative. During the third quarter of 2007, we changed how we define the embedded derivative feature associated with the Series A-1 Redeemable Convertible Preferred Stock (“Series A-1 Preferred Stock”) issued in conjunction with the Princeton acquisition on July 3, 2006. We bifurcated the fair market value of this feature in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”). Previously, the embedded derivative was defined as the right to receive interest like returns on accrued, but unpaid dividends and was included in other long-term liabilities on the balance sheet at its fair value at the date of acquisition. The fair value was marked to market at the end of each reporting period by adjusting interest expense. We determined that the embedded derivative is more appropriately defined as the right to receive a fixed rate of return on the accrued, but unpaid dividends and the variable negotiated rate, which creates a theoretical swap between the fixed rate of return on the accrued, but unpaid dividends and the variable rate actually accrued on the unpaid dividends. This embedded derivative was reclassified from other long-term liabilities to Series A-1 Preferred Stock in the mezzanine section on the consolidated balance sheet and is marked to market at the end of each reporting period through earnings and an adjustment to other assets or other long-term liabilities in accordance with SFAS No. 133.

There is no active quoted market available for the fair value of the embedded derivative. Thus, management has to make substantial estimates about the future cash flows related to the liability, the estimated period which the Series A-1 Preferred Stock will be outstanding and the appropriate discount rates commensurate with the risks involved.

Derivative Instruments and Hedging Activities. From time to time, the Company has entered into derivative instruments to serve as cash flow hedges for its debt instruments. SFAS No. 133 requires companies to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.

For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income or loss and reclassified into operations in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings (for example, in “interest expense” when the hedged transactions are interest cash flows associated with floating-rate debt). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in other income/expense in current operations during the period of change. Alternatively, if meeting the criteria of Derivative Implementation Group Statement 133 Implementation Issue No. G20, a cash flow hedge is considered “perfectly effective” and the entire gain or loss on the derivative instrument is reported as a component of other comprehensive income or loss and reclassified into operations in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings. Derivatives are reported on the balance sheet in other current and long-term assets or other current and long-term liabilities based upon when the financial instrument is expected to mature. Accordingly, derivatives are included in the changes in other assets and liabilities in the operating activities section of the statement of cash flows. Alternatively, in accordance with SFAS No. 95, Statement of Cash Flows , derivatives containing a financing element are reported as a financing activity in the statement of cash flows.

Stock-Based Compensation. On January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”). Prior to the adoption of SFAS 123(R), we accounted for our equity compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and related interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). No stock-based employee compensation cost was recognized in the consolidated statements of operations for 2005, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), using the modified-prospective transition method. Under that transition method, compensation cost recognized in 2006 and 2007 include: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted on or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in this model are expected dividend yield, expected volatility, risk-free interest rate and expected term. The expected volatility for stock options is based on historical volatility.

Recently Issued Pronouncements. In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157” ). The standard provides guidance for using fair value to measure assets and liabilities. Under the standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. Also, fair value measurements would be separately disclosed by level within the fair value hierarchy which gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, for example, the reporting entity’s own data. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances.

SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 for financial assets and financial liabilities and 2008 for non financial assets and non financial liabilities and interim periods within those fiscal years. We elected to adopt the standard beginning on January 1, 2008. We are currently assessing the impact that SFAS No. 157 will have on our results of operations and financial position.

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

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations , which will improve reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial statements. The new standard will require the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. This pronouncement is effective for financial statements issued subsequent to December 15, 2008. Early adoption is not permissible, therefore we will apply this standard to acquisitions made after January 1, 2009. Also see Note 2, Summary of Significant Accounting Policies , in the Notes to the Consolidated Financial Statements contained in Part II, Item 8, of this Annual Report on Form 10-K, which discusses accounting policies.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

OVERVIEW

We provide outsourced financial technology services branded to thousands of financial institutions, billers and credit service providers. With four business lines in two primary vertical markets, we serve over 10 million billable consumer and business end-users. End-users may access and view their accounts online and perform various web-based self-service functions. They may also make electronic bill payments and funds transfers utilizing our unique, real-time debit architecture, ACH and other payment methods. Our value-added relationship management services reinforce a favorable user experience and drive a profitable and competitive Internet channel for our clients. Further, we have professional services, including software solutions, which enable various deployment options, a broad range of customization and other value-added services. We currently operate in two business segments — Banking and eCommerce. The operating results of the business segments exclude general corporate overhead expenses.

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

As a network-based service provider, we have made substantial up-front investments in infrastructure, particularly for our proprietary systems. While we continue to incur ongoing development and maintenance costs, we believe the infrastructure we have built provides us with significant operating leverage. We continue to automate processes and develop applications that allow us to make only small increases in labor and other operating costs relative to increases in customers and transactions. We believe our financial and operating performance will be based primarily on our ability to leverage additional end-users and transactions over this relatively fixed cost base.

Results of Operations

The following table presents the summarized results of operations for our two reportable segments, Banking and eCommerce. We changed the way we determine operating results of the business segments during the third quarter of 2008. Intangible asset amortization costs that previously had been unallocated are now allocated to the respective Banking or eCommerce segments. For each of the three months ended September 30, 2008 and 2007, $2.1 million of intangible asset amortization was reclassified from unallocated to Banking and eCommerce segments.

THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2007

Revenues

We generate revenues from account presentation, payment, relationship management and professional services and other revenues. Revenues increased $3.9 million, or 11%, to $38.1 million for the three months ended September 30, 2008. The increase is attributable to the addition of revenues from ITS, which we acquired on August 10, 2007.

Account Presentation Services. Both the Banking and eCommerce segments contribute to account presentation services revenues, which decreased 17%, or $0.4 million, to $1.9 million. The decrease is due to the departure of a large card account presentation services client in April 2008.

Payment Services. Both the Banking and eCommerce segments contribute to payment services revenues, which increased to $30.5 million for the three months ended September 30, 2008 from $27.2 million in the prior year quarter. The increase was related to the addition of new revenues from the acquisition of ITS. Revenues from the remainder of the Company decreased slightly due to a decrease in the Banking segment; partially offset by an increase in the eCommerce segment. The decrease in the Banking segment was due to the departure of three large banking bill payment clients in August 2007, December 2007 and April 2008 and lower float interest revenues due to lower interest rates. Banking payment transactions decreased by 7% compared to the third quarter of 2007, and biller transactions grew by 28%. Banking payment transactions declined as a result of the departures of three large banking bill payment clients. After excluding transactions from the three departed clients, banking payment transactions grew by 18%. Revenues in the eCommerce segment increased due to growth in biller transactions, excluding ITS, as a result of increased usage at our existing clients and the net addition of new clients since 2007. Biller transaction growth is higher due to the relative immaturity of that market.

Relationship Management Services. Primarily composed of revenues from the Banking segment, relationship management services revenues increased by $0.4 million in the third quarter of 2008, or 23%. Revenues increased as a result of a one-time adjustment that reduced revenue by $0.4 million during the third quarter of 2007 related to a change in method of recognition of deferred revenue and costs for deferred new user setup fees. Revenues would have otherwise remained relatively constant due to our decision to bundle our call center service to banking clients with our account presentation and payment services.

Professional Services and Other. Both the Banking and eCommerce segments contribute to professional services and other revenues, which increased $0.5 million, or 16%. Revenues from professional services and other fees primarily increased due to the timing of sales of our annual compliance package, which occurred in the second quarter last year, but occurred in the third quarter in 2008.

Costs of Revenues. Costs of revenues encompass the direct expenses associated with providing our services. These expenses include telecommunications, payment processing, systems operations, customer service, implementation and professional services work. Costs of revenues increased by $3.4 million to $19.6 million for the three months ended September 30, 2008, from $16.2 million for the same period in 2007. The inclusion of costs for ITS, which was acquired in August 2007, represents the majority of this increase. The remaining increase is the result of an increase in volume-related payment processing costs and an increase in amortization related to the release of a number of software development projects into production since the second quarter of 2007.

Gross Profit. Gross profit increased $0.5 million for the three months ended September 30, 2008; however, excluding ITS results, gross profit would have decreased due to the departures of four large clients in the last twelve months.

General and Administrative. General and administrative expenses primarily consist of salaries for executive, administrative and financial personnel, consulting expenses and facilities costs such as office leases, insurance and depreciation. General and administrative expenses increased $0.4 million, or 5%, to $8.0 million for the three months ended September 30, 2008. The increase was partially due to the addition of general and administrative expenses for ITS, which was acquired in August 2007. Also contributing to the increase are $0.3 million of strategic and market development expenses that were part of sales and marketing in the prior year, but are included as general and administrative expenses in the current year due to a change in that group’s core responsibilities.

Sales and Marketing. Sales and marketing expenses include salaries and commissions paid to sales and client services personnel and other costs incurred in selling our services and products. Sales and marketing expenses increased $0.3 million, or 5%, to $6.0 million for the three months ended September 30, 2008. The increase is primarily due to the addition of sales and marketing expenses for ITS, which was acquired in August 2007. The increase was partially offset by strategic and market development expenses that were part of sales and marketing in the prior year, but are included as general and administrative expenses in the current year due to a change in that group’s core responsibilities.

Systems and Development. Systems and development expenses include salaries, consulting fees and all other expenses incurred in supporting the research and development of new services and products and new technology to enhance existing products. Systems and development expenses increased by $0.3 million, or 14%, to $2.5 million for the three months ended September 30, 2008. The increase is primarily due to the addition of systems and development expenses for ITS, which was acquired in August 2007. We capitalized $1.6 million and $2.0 million of development costs associated with software developed for internal use or to be sold, leased or otherwise marketed during the three months ended September 30, 2008 and 2007, respectively.

Income from Operations. Income from operations decreased $0.5 million, or 18%, to $2.1 million for the three months ended September 30, 2008. The decrease is primarily due to the departures of four large clients in the past twelve months, which negatively impacted our income from operations as a result of our high incremental margin, fixed cost business model. Additionally, income from operations was negatively impacted by lower float interest revenues in 2008, which has no associated costs and is the result of lower interest rates.

Interest Income. Interest income decreased $0.2 million to $0.1 million for the three months ended September 30, 2008 due to lower average interest earning cash balances and lower average interest rates.

Interest and Other Expense. Interest and other expense increased by $1.4 million for the three months ended September 30, 2008 due primarily to an increase in expense related to the mark-to-market valuation of the ITS price protection of $1.5 million and an increase in expense related to the theoretical swap derivative of $0.5 million, partially offset by lower interest expense on the senior secured 2007 notes (“2007 Notes”). The interest is based on the one-month London Interbank Offered Rate (“LIBOR”), which dropped considerably compared to the prior year period. The effective tax rate for the three months ended September 30, 2007 was 2.6%. The tax provision of $0.1 million primarily related to state taxes.

Income Tax (Benefit)Provision. We recognized tax expense for the three months ended September 30, 2008 as a result of $1.1 million of income before income taxes generated during the third quarter of 2008. Our effective tax rate for the period was 30.6%. The difference between our effective tax rate and the federal statutory rate is primarily due to non-taxable items and state taxes. The non-taxable items include the mark to market adjustment valuation of the ITS price protection and interest expense for the accretion of the Series A-1 Preferred Stock.

Preferred Stock Accretion. The accretion related to the Series A-1 Preferred Stock issued on July 3, 2006 increased partially as a result of higher interest costs related to the escalation accrual associated with the Series A-1 Preferred Stock. It also increased due to a change in valuation methodology of the escalation accrual during the third quarter of 2007. The escalation accrual represents a money-market rate of interest on the accrued, but unpaid, dividends.

Net (Loss) Income Available to Common Stockholders. Net (loss) income available to common stockholders decreased $2.6 million to a net loss of $1.5 million for the three months ended September 30, 2008, compared to net income of $1.1 million for the three months ended September 30, 2007. Basic and diluted net loss per share was $0.05 for the three months ended September 30, 2008, compared to basic and diluted net income per share of $0.04 for the three months ended September 30, 2007. Basic shares outstanding increased by 5% as a result of shares issued in connection with the exercise of company-issued stock options, our employees’ participation in our employee stock purchase plan and the 2.3 million shares issued with the acquisition of ITS, net of the repurchase of shares from ITS shareholders exercising their price protection rights. Diluted shares outstanding decreased by 2% as a result of the anti-dilutive effect of certain common stock equivalents in the third quarter of 2008.

NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2007

Revenues

Revenues increased $17.4 million, or 18%, to $114.5 million for the nine months ended September 30, 2008. This increase was attributable to the addition of revenues from our acquisition of ITS, which we acquired on August 10, 2007.

Account Presentation Services. Both the Banking and eCommerce segments contribute to account presentation services revenues, which decreased 9%, or $0.6 million, to $6.1 million. The decrease is due to the departure of two card account presentation services clients in April 2007 and 2008.

Payment Services. Both the Banking and eCommerce segments contribute to payment services revenues, which increased to $92.5 million for the nine months ended September 30, 2008 from $74.4 million in the same period of the prior year. While the majority of the increase was related to the addition of new revenues from the acquisition of ITS, the remaining increase was driven by growth in our eCommerce segment. Banking transactions decreased by 4% compared to the first nine months of 2007, and biller transactions grew by 37%. Banking transactions decreased as a result of the departures of three large banking bill payment clients in August 2007, December 2007 and April 2008. After excluding transactions from the three departed clients, banking payment transactions grew by 21%. Additionally, banking revenues declined as a result of lower interest rates, which negatively impacted float interest revenues. Revenues in the eCommerce segment increased due to growth in biller transactions, excluding ITS, as a result of increased usage at our existing clients and the net addition of new clients since 2007. Biller transaction growth is higher due to the relative immaturity of that market.

Relationship Management Services. Primarily composed of revenues from the Banking segment, relationship management services revenues increased slightly from $5.9 million in the nine months ended 2007 to $6.1 million in the same period ended 2008. Revenues increased as a result of a one-time adjustment that reduced revenue by $0.4 million during the third quarter of 2007 related to a change in method of recognition of deferred revenue and costs for deferred new user setup fees. Revenues otherwise remained relatively constant due to our decision to bundle our call center service to banking clients with our account presentation and payment services.

CONF CALL

Beth Halloran

Thank you to everyone who has joined us today on our conference call for third quarter 2008 results. Shortly, Matt Lawlor, Chairman and CEO; Ray Crosier, President and COO; and Cathy Graham, Executive Vice President and CFO, will present Online Resources’ financial and operating performance.

Before we get started, I want to invite you to view our press release and some exhibits that we will refer to during the call labeled “Third Quarter 2008 Earnings Call Slides.” You can see these in the Press Room and in the Investors section of our web site at orcc.com. But first, as is our practice, I would like to preface our remarks today by taking full advantage of the Safe Harbor provisions of the Securities Litigation Reform Act. The following conference call contains statements about future events and expectations of Online Resources that are forward-looking and involve risks and uncertainties detailed in filings made by the company with the Securities and Exchange Commission. I’ll provide a more detailed review of the Safe Harbor provisions at the end of this call.

Now to you, Matt.

Matt Lawlor

Welcome everyone. Our call today will cover three topics. First, we delivered results in the range of our financial products for the third quarter. Despite still lower interest rates and prior year client losses, revenue grew at double digits. Earnings were slightly down, as expected, but would have been increased very substantially if normalized to reflect an apples-to-apples comparison to the prior year.

Second, our operating fundamentals continue to trend up nicely on a seasonal basis. Billpay transaction growth was strong, particularly for our eCommerce business line. We also signed a number of major new clients and renewed our largest client to a multi-year contract. The lift from these signings and new product sales further validates the strategic benefit of the acquisitions made over the past four years.

Finally, we will report on steps taken to preserve our financial and operating standing in a weakened economy. Our first line of defense rests with a durable, well-diversified client base, which appreciates the advantages of an expanding online and electronic payment channel. At the same time, we have taken the initiative to further control our costs in order to drive higher earnings and cash flow.

With that, I’d like to turn the call over to Cathy to report on our financial results.

Cathy Graham

Good afternoon everyone. Today I’d like to take you through our third quarter financial results, review our guidance for the remainder of the year, and make a few comments regarding our current expectations for 2009.

For the third quarter, all of our revenue and earnings metrics were within the guidance ranges we provided. Revenue grew 11% over the same quarter of the prior year. A full quarter of revenue from our ITS acquisition offset most, but not all, of the revenue lost to steep interest rate declines and previously announced large client departures. Fundamentally, however, seasonally-appropriate transaction growth was the key driver of continuing client revenue.

EBITDA showed a slight increase, and core net income showed a slight decrease, compared to the third quarter of 2007. These trends were due almost entirely to interest rate and client departure impacts. If the only change to third quarter 2008 had been that interest rates remained consistent with the prior year period, EBITDA would have shown 20% year-over-year growth. If you then adjusted the 2007 period for client departures, year-over-year EBITDA growth would have been 50%.

These same factors impacted core net income per share for the quarter. With constant interest rates, core EPS would have increased 13% year-over-year. And without departed clients, that growth rate would have increased to 80%. We reported a net loss available to common stockholders in the third quarter compared to the net income we reported in the 2007 period. In addition to absorbing interest rate and departed client impacts, this quarter’s comparison suffered from the fact that the comparable period contained approximately $2.2 million in non-cash accounting and valuation benefits that offset interest expense.

Looking at the balance sheet, we maintained unrestricted cash, equivalents and short term investments totaling $17.6 million at September 30. During the quarter, we generated $4.1 million in cash flow available for debt reduction, and used this to repay $3.2 million in principal on our senior secured debt, reducing its balance to $78 million. We will continue to make quarterly payments on this debt on an accelerating schedule, through its maturity in early 2012.

Turning to guidance for the remainder of the year, we have provided you with our expectations for the fourth quarter and full year 2008. Given year-to-date results and interest rates that continue to decline, we have narrowed our guidance to the low end of our current range for the full year. For fourth quarter, the midpoint of our revenue guidance represents only slight growth, both year-over-year and sequentially. Though we anticipate continuing transaction increases, including a normal seasonal uptick, we are planning for further interest rate cuts and continuing longer sales cycles.

Year-over-year EBITDA growth is forecasted to be modest for the fourth quarter. While we are still experiencing the factors that impacted us in third quarter, we have been able to take additional measures to reduce our cost base. Ray will describe these more for you momentarily. This allows us to expect both sequential midpoint EBITDA growth of 28% and that we will meet our goal of exiting 2008 at a 26% or better EBITDA margin.

As with EBITDA, fourth quarter core earnings per share growth will not likely be significant year-over-year, but sequential growth is expected to be high – over 80% at the midpoint – due both to seasonality and cost saving initiatives. For full year 2008, the midpoints of our narrowed revenue and core earnings guidance represent mid-teens annual growth rates. We expect earnings growth to accelerate as we move into 2009 and get past the impacts that interest rate declines and large client departures have on our period-to-period comparisons.

As is our practice, we will provide 2009 guidance in early December, after we complete our budget cycle. Though we anticipate continued growth from our key business drivers, we also expect to confront the continuing effects of a weak, volatile and unpredictable economy. Investors should therefore expect our guidance to be appropriately conservative, particularly with regard to top-line growth. We will focus on continued cost control to achieve increased earnings and cash flow, and we are willing to trade-off less certain revenue opportunities to deliver a more certain bottom line.

So in summary, this was a quarter in which the impact of economic conditions and past client departures masked solid earnings growth driven by strong operating fundamentals. We were in line with our expectations, but continuing interest rate declines caused us to come in at the mid-to-low end of our range. We expect to see a similar pattern for the remainder of the year, with our operating drivers experiencing their normal seasonal uptick in the fourth quarter, offset by continuing rate compression.

Now, let me turn you over to Ray for his operating update.

Ray Crosier

Thanks Cathy. Today I’ll comment on third quarter highlights for each of the markets we serve and talk more specifically about some actions we took in the quarter to position us for higher earnings and cash flow next year.

Let’s begin with eCommerce, where we serve billers, card issuers, and other credit providers. We sold two more top 10 credit card issuers for our web based collections. We now serve 6 of the top 10 and 14 of the top 20 for card presentment, payment, or collection services. Additionally, several of those clients are expanding their use of the web collections beyond delinquent card portfolios and into other loans they service such as mortgage, auto, home equity, and consumer. Still in eCommerce, equally good sales progress was made with billers. We signed two sizable contracts worth $0.5 million each per year, in addition to the usual handful of smaller deals. In addition, two of our large asset receivable management clients expanded their relationship beyond payment services and opted to add web collections. As for 3Q transaction growth in eCommerce, we experienced steady bill payment increases of 7% sequential and 41% year over year.

We continue to expect that our eCommerce business will particularly benefit from increased scale, as we layer more volume over relatively fixed costs. In my opinion, the combination of the three acquisitions that make up the eCommerce business is starting to really click. We continue to cross-sell new products into the existing customer bases in each of the vertical markets we serve. In addition, the breadth of services we now offer has become a real differentiator for us. No one delivers the complete suite of services we do, where account presentment, payment processing, and recovery of delinquencies can all be integrated into one seamless consumer experience.

I’d like to turn now to Banking, which also had a solid quarter. In the community banking and credit union market, we signed a $2.7 billion credit union with 30,000 existing billers to a four year bill payment contract. We also completed our mobile beta for nine clients, and we launched the downloadable mobile application for banking and bill payment into full production. And, we had a record quarter selling additional products to existing community banking clients. In the national banking market, where we serve regional and large financial institutions over $6 billion in assets, we renewed our largest client, TD Bank. TD Bank was formed by the combination of TD Banknorth and Commerce Bank, where we had previous relationships. And I’m pleased to report that this multi-year renewal came with significant volume commitments. By virtue of this contract extension and the other renewals in the quarter, we achieved one of our most important goals for the year in the big bank market; to renew 100% of our national banking clients whose contracts were expiring in 2008. We’re really proud of the team for this accomplishment.

Looking at user and transaction growth across Banking Services, the numbers were seasonally typical and pretty much what we expected. Users from continuing banking clients, which factors out large departing clients from prior year quarters, grew 3% sequentially and 20% year over year. Bill payment transactions grew a similar 2% sequentially and 18% year over year.

Now I’d like to address some steps we recently took for earnings expansion in periods ahead. If you recall from my remarks last quarter, I talked about the challenge we faced having to manage the business to the bottom line in a pretty tough economic environment. On one hand, we needed to pare back expenses, and on the other we needed to be careful in making those trade-offs so as not to jeopardize existing business or future opportunities. One move we just made was to right size our business. We made the decision to basically hold total headcount constant through 2009, and only allow staff increases in those areas that are growth related. In order to fund those additional resources, we took the step of eliminating approximately 5% of our current staff positions.

The second step we took was to moderate non-critical capital expenditures. Obviously, we will continue to invest in areas necessary to support existing business and planned growth, but outside of that, we’re slowing CapEx spending.

The third action was a renewed focus on a program we call Optimus, which is designed to reduce costs and improve efficiencies across the enterprise. This includes the usual belt tightening, but also finding better ways to streamline processes, improve throughput, and more effectively operate our business. A number of initiatives were completed in third quarter under the Optimus umbrella. I believe these actions, while some painful, were necessary to position the company for continued EBITDA and cash flow expansion, and deliver on our promise of doing the right thing for shareholders and employees alike.

Matt?

Matt Lawlor

Thanks Ray. So, with the obvious exception of our stock price, I believe we are in good shape fundamentally. First, we are performing in line with our financial expectations and our operating fundamentals continue to trend up nicely. In addition, there are some very significant upsides, including the eventual rebound of the very low interest rates that have recently been a drag on our earnings. Second, our acquisitions are starting to contribute materially to growth. The former Integrated Data Systems has provided significant differentiation in the internet banking market, which is winning us deals. The former Incurrent provides the backbone of our expanding web collections service. Last year's ITS acquisition adds distribution for web collections. And the former Princeton eCom is now the anchor for our fast growing ecommerce business, with 41% transaction growth this last quarter.

Third, I believe our risk-reward profile is quite favorable. We have an attractive business model, with over 90% recurring revenue. And most of the acquisition risks and uncertainties are now behind us. We have further trimmed expenses to make sure we have ample cash flow to service acquisition debt, and we have right-sized our staff to support our key growth opportunities. I also believe our diversified client base and low level of revenue concentration mitigates our risk, and I'd like to spend a couple of minutes talking about that.

I will be referring to some slides posted on our website. As Beth mentioned earlier, go to the Press Room or the Investors section of orcc.com, and posted with the press release is a link called “Third Quarter 2008 Earnings Call Slides.”

Recognizing that there are some daunting challenges ahead for our clients, we believe that our client base is still a source of strength for the company. Looking at the chart on Slide 1 of the presentation, you will see our client mix based on 2008 year-to-date revenue. First note that no single industry segment exceeds 33%. This gives us a balanced portfolio of clients, and limits our exposure to any industry-specific problems.

Also note the balance between banking and ecommerce. Banking industry segments now comprise 63% of our business. eCommerce contributes 37%. This reflects a fundamental shift in our client mix over the past four years, where we enjoy synergies between banks and billers, as well as a more diversified client mix.

A portion of our commercial clients are credit card issuers. Though technically banks, we treat them as commercial enterprises, because the business drivers and regulations are very different from depository institutions. Moreover, most of our credit card issuers use us primarily for web-based collections, like our ARM clients. As we’ve previously outlined, this is a high growth area of our business that is counter-cyclical to the economy.

The chart also shows that credit unions comprise 33% of our business. This exceeds the banks. Our credit unions have limited commercial real-estate exposure and securitized mortgages. These clients have consumer loan exposure, but as reported by Callahan & Associates, credit unions typically have lower loan loss ratios than other credit providers. Also note that while 12% of our revenue is tied to large banks with over $6 billion in assets, these clients tend to be strong regional banks who have stuck to the traditional core businesses.

Finally, you can see that about 18% of our revenue is from community banks. Our community banks are strong and tend to have better asset quality than average. I’d like to turn your attention to Slide 2. Here we examine the concentration of our revenues to ascertain our exposure to industry consolidation and buyer-leverage. By depending less on any single client or group of clients, we reduce this exposure. First, no single client exceeds 3% of revenue. Second, our top ten clients represent just 16% of our business, a high level of diversification by any measure.

In sum, we believe our portfolio of clients diversifies us more than most. It is diversified by size, industry segment and percentage of revenue. Further, our largest segments are expected to be the durable ones. Finally, I know that banking industry consolidation is on the minds of a lot of investors, particularly with the recent TARP capital funding, relaxed mark-to-market rules and tax loss changes. But I would not be so quick to assume that there's going to be a rush by the banks to consolidate. TARP funds are designed to re-liquefy the banks, not simply to provide investment funds. I believe that TARP was primarily about rolling up weak banks; Treasury would not have approved recent funding to a number of regional banks that are widely considered good candidates for consolidation. Furthermore, we now have cheap government money and an extremely accommodative Fed policy. That supports strong bank earnings and continued independence – not the other way around.

So while I appreciate that there are sound arguments for consolidation, I'm more in the camp that there will be a period of balance sheet healing, followed by perhaps modest consolidation, more typical of periods of economic weakness. But to be perfectly honest, who can say? Anyone who claims to have a crystal ball in this rapidly changing environment should be prepared to be humbled, even if they get lucky. This brings me back to the fundamental tenant of my earlier remarks – even if there is banking consolidation, he who wins is he who is best diversified.

That’s why I believe we are in good shape – with a healthy balance between banking and ecommerce, which is diversified by industry segment, size and revenue. But beyond all the macro-economics, it’s really all about the individual circumstances of our clients. We keep a watch list and it’s rather small. And at the end of the day, I believe the vast majority of our clients are well-managed, resilient, savvy operators who will be the survivors of whatever the economy throws at them.

Thanks for listening. We’d be happy to answer your questions.

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