2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Vistaprint N.V., its wholly owned subsidiaries, and those entities in which we have a variable interest and are the primary beneficiary. Intercompany balances and transactions have been eliminated. The consolidated financial statements also include the accounts of Albumprinter Holding B.V. and its subsidiaries (collectively, "Albumprinter") and Webs, Inc. ("Webs") from the date of each acquisition, both of which occurred in the second quarter.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments, consisting primarily of normal recurring accruals, considered necessary for a fair presentation of the results of operations for the interim periods reported and of our financial condition as of the date of the interim balance sheet have been included. Operating results for the three and six months ended December 31, 2011 are not necessarily indicative of the results that may be expected for the year ending June 30, 2012 or for any other period. The condensed consolidated balance sheet at June 30, 2011 has been derived from our audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended June 30, 2011 included in the our Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (the "SEC").

Cash, Cash Equivalents and Marketable Securities

We consider all highly liquid investments purchased with an original maturity of three months or less to be the equivalent of cash for the purpose of balance sheet and statement of cash flows presentation. Marketable securities, when held, consist primarily of investment-grade corporate bonds, U.S. government agency issues, and certificates of deposit. We did not hold any marketable securities as of December 31, 2011.

We review our investments for other-than-temporary impairment whenever the fair value of an investment is less than amortized cost and evidence indicates that an investment's carrying amount is not recoverable within a reasonable period of time. There were no other-than-temporary impairments during the three and six months ended December 31, 2011 and 2010.

The carrying value of our cash, cash equivalents and marketable securities at December 31, 2011 and June 30, 2011 is equal to fair value.

Treasury Shares

Treasury shares are accounted for under the cost method and included as a component of shareholders' equity. During the three and six months ended December 31, 2011, we repurchased 3,835,772 and 6,910,604 of our ordinary shares for a total cost of $118,557 and $209,645, respectively, inclusive of transaction costs, in connection with our publicly announced share repurchase programs.

Share-Based Compensation

During the three and six months ended December 31, 2011, we recorded share-based compensation expense of $4,863 and $9,586, respectively, and $6,224 and $11,595 during the three and six months ended December 31, 2010, respectively. Share-based compensation costs capitalized as part of software and website development costs were $19 and $76 for the three and six months ended December 31, 2011, respectively, and were $69 and $193 for the three and six months ended December 31, 2010, respectively.

At December 31, 2011, there was $48,286 of total unrecognized compensation cost related to unvested share-based compensation arrangements, net of estimated forfeitures. This cost is expected to be recognized over a weighted average period of 2.4 years. Total unrecognized compensation includes the restricted share awards ("RSAs") granted as part of the Webs acquisition that is expected to be recognized over a period of 2 years. See Note 3 for further details.

Income Taxes

Income tax expense decreased to $2,871 and $4,978 for the three and six months ended December 31, 2011, as compared to $3,923 and $5,215 for the three and six months ended December 31, 2010. During the three months ended December 31, 2011, we recorded tax benefits from a currency exchange loss recognized by one of our Dutch entities for tax purposes in the quarter and the acquisitions, net of non-deductible transaction costs. Excluding these benefits, our tax expense would have increased due to growth in our organic business' operating expenses, which form the basis upon which our transfer pricing agreements determine pre-tax profits and related income tax expense for most of our legal entities. The intercompany services and related agreements among Vistaprint N.V. and its subsidiaries ensure that most of our subsidiaries realize profits based on their operating expenses, which results in taxable profits regardless of the level of consolidated pre-tax income or loss.

Generally, our projected annual effective tax rate is applied to our quarterly results to determine our income tax for the quarter. The decrease in the overall effective tax rate from the same prior period is primarily due to the impact of the aforementioned currency exchange tax benefit recognized in the quarter and tax benefit related to the two acquisitions, net of non-deductible transaction costs. Excluding the impact of these items, the overall effective tax rate would have been higher compared to the same prior year period largely due to the reduction in our consolidated pre-tax income as a result of planned investments in support of our long-term growth strategy and the expiration of the U.S. federal research and development tax credit on December 31, 2011. Since our income tax expense is mainly a function of our operating expenses and cost-based transfer pricing methodologies and not a function of our consolidated pre-tax income, our effective tax rate will typically vary inversely to changes in our consolidated pre-tax income. We expect this variation will continue in future periods.

As of December 31, 2011, we had a liability for unrecognized tax benefits included in the balance sheet of approximately $2,655, including accrued interest of $360. There have been no significant changes to these amounts during the three and six months ended December 31, 2011. The total amount of unrecognized tax benefits will reduce the effective tax rate if recognized. We recognize interest and, if applicable, penalties related to unrecognized tax benefits in the provision for income taxes.

One of our U.S. subsidiaries and one of our Bermuda subsidiaries are under audit by the United States Internal Revenue Service ("IRS"). In April 2011, the U.S. subsidiary received a Revenue Agent's Report from the IRS assessing tax for the years under examination. We disagree with the position taken by the IRS and have filed a written protest for submission to the IRS Office of Appeals. However, the matter currently remains at the examination stage pending further review and discussion with the IRS. Also, the same U.S. subsidiary is under audit by the Commonwealth of Massachusetts. In addition, the Canada Revenue Agency is auditing one of our Canadian subsidiaries. We do not believe that the resolution of these tax examinations will have a material impact on our financial position or results of operations.

Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted-average number of ordinary shares outstanding for the fiscal period. Diluted net income per share gives effect to all potentially dilutive securities, including share options, restricted share units ("RSUs"), and RSAs, using the treasury stock method.

The following table sets forth the reconciliation of the weighted average number of ordinary shares for purposes of computing net income per share:


	Three Months Ended December 31,				Six Months Ended December 31,
	2011		2010		2011		2010
Weighted average shares outstanding, basic		37,638,224		43,689,651		39,439,181		43,792,280
Weighted average shares issuable upon exercise / vesting of share options/RSUs/RSAs		1,016,516		1,417,484		1,034,840		1,376,480

Shares used in computing diluted net income per share		38,654,740		45,107,135		40,474,021		45,168,760

Weighted average anti-dilutive shares excluded from diluted net income per share		1,558,542		608,938		1,602,546		873,771

Recently Issued Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board ("FASB") issued ASU 2011-04 Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and International Financial Reporting Standards ("IFRS"), which is intended to result in convergence between GAAP and IFRS requirements for measurement of, and disclosures about, fair value. The new standard clarifies or changes certain fair value measurement principles and enhances the disclosure requirements, particularly for Level 3 fair value measurements. The new guidance is effective for our third quarter of the current fiscal year and will not have a material effect on our financial position or results of operations.

In June 2011, the FASB issued ASU 2011-05 Presentation of Comprehensive Income, which makes the presentation of items within other comprehensive income ("OCI") more prominent. The new standard will require companies to present items of net income, items of OCI and total comprehensive income in one continuous statement or two separate consecutive statements, and companies will no longer be allowed to present items of OCI in the statement of shareholders' equity. The new guidance is effective for our fiscal year ending June 30, 2013, and interim periods in that year, and its adoption will not have a material effect on our financial position or results of operations.

In September 2011, the FASB issued ASU 2011-08 Testing Goodwill for Impairment, which provides updated guidance on the periodic testing of goodwill for impairment. This new standard will allow companies to assess qualitative factors to determine if it is more likely than not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. The new guidance is effective for our fiscal year ending June 30, 2013, with early adoption permitted. We expect to early adopt this guidance in our fiscal third quarter and we are evaluating the impact on our future goodwill impairment tests.