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CARREKER CORPORATION Index
Item 8. Financial Statements and Supplementary Data.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

Commission file number 0-24201

CARREKER CORPORATION
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code:(972) 458-1981

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, par value $0.01 per share
(Title of class)

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

        Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes o No ý

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

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

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer o                Accelerated Filer ý                Non-Accelerated Filer o

        Indicate by check mark whether the registrant is an accelerated filera shell company (as defined in Rule 12b-2 of the Exchange Act Rule 12b-2)Act).    Yes ýo No oý

        The aggregate market value on July 31, 20042005 of the voting and non-voting common equity held by non-affiliates of the registrant was $202,239,992.$130,729,257.

        Number ofThere were 25,328,615 shares of registrant'sour Common Stock, par value $0.01 per share, outstanding as of March 31, 2005: 24,859,5032006.

DOCUMENTS INCORPORATED BY REFERENCE

        Selected portions of the registrant'sour definitive Proxy Statement for the 20052006 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.

CARREKER CORPORATION

Index

PART I

Item 1. Business.

        Unless the context otherwise requires, the term "we," "us," "our," "Company," "Carreker," or "Carreker Corporation" when used in this Form 10-K ("Report") and in the Annual Report to the Stockholders refers to Carreker Corporation, a Delaware corporation organized in 1998, and its consolidated subsidiaries and predecessors. Our Internet Website address iswww.Carreker.com. www.Carreker.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available, free of charge, on our Internet Website under "Investor Relations (IR)—SEC Filings" as soon as reasonably practicable after we file electronically such material with, or furnish it to, the United States Securities and Exchange Commission, or SEC. Information on our Internet Website does not constitute a part of this Report. This Report contains some forward-looking statements within the meaning of the federal securities laws. When used in this Report, the words "expects," "plans," "believes," "anticipating," "estimates," and similar expressions are intended to identify forward looking statements. Actual results and the timing of some events could differ materially from those projected in or contemplated by the forward looking statements due to a number of factors, including without limitation those set forth under "Forward Looking Statements and Risk"Risk Factors" below.

Our Business Focus

        For the last 2728 years Carreker Corporation has designed, developed, sold and delivered payments-related software and consulting solutions to financial institutions and financial service providers. More recently, we have introduced a business process outsourcing solution to our customers. Our products and services address a broad spectrum of payment activities and are designed to help our clients enhance the performance of their payments businesses; improve operational efficiency in payments processing; enhance revenue and profitability from payments-oriented products and services; reduce losses associated with fraudulent payment transactions; facilitate compliance with risk-related laws and regulations; and/or maximize clients' customer income streams by aligning their customer interactions and products with customer needs.

        We are organized into three primary operating divisions: Global Payments Technologies ("GPT"), Revenue Enhancement ("RevE") and Global Payments Consulting ("GPC"). These operating divisions are operated in discrete yet synergistic ways to bring value to our clients. In addition we have established As of January 31, 2006, Carreker employed a joint venture named Carretek LLC to address the payments outsourcing arena.total of 495 employees.

Products and Services

        The products and services of our three primary operating divisions are described below in this sequence: Global Payments Technologies ("GPT"), Revenue Enhancement ("RevE") and, Global Payments Consulting ("GPC") and Carretek LLC ("Carretek").

        Global Payments Technologies Solutions.    Carreker's technology solutions help financial institutions address the needs of some critical payment services and delivery functions that impact overall operating revenues and costs and risk management. These functions include presentment of checks in paper and electronic form, identification and mitigation of fraudulent payments, handling irregular items such as checks returned unpaid (exceptions), maintaining a record of past transactions (archiving), responding to related customer inquiries (research), and correcting any errors that are discovered (adjustments). Global Payments Technologies ("GPT") solutions address these and other key functions in the context of improving operational efficiency and a gradual transition from paper to electronic-based payment systems. In addition,GPT offers Risk Management solutions that mitigate depository account risk through profiling and advanced analytics technology. GPT Risk solutions leverage transaction monitoring and filtering capabilities for AML and OFAC compliance. Finally, we offer technology solutions that optimize the inventory management of a bank's cash stock levels and logistical service requirements, including managing how much is needed, when it is needed and where it is needed. Our solutions reduce the amount of cash banks need to hold in reserve accounts and as cash-on-hand while ensuring a high level of customer service through timely replenishment of ATM cash supplies at minimal logistical services cost.

Specific solutions in the GPT group include:

        Revenue Enhancement.    The Revenue Enhancement division includes two business units: RevE and Customer Value Enhancement ("CVE"RevE"), formerly known as EnAct. RevE is a highly specialized division that provides consulting services focused on tactical methods of increasing banks' fee income. The scope and depth of this practice has expanded throughout its 14 year history and now includes retail, small business, and commercial deposits, treasury management, consumer and commercial lending, credit card lending and trust and investment services. Our solutions involve developing strategies that enable our clients to take advantage of electronification trends, often gaining first mover advantages for our clients. In addition to developing strategies, our business model ensures that we continue to translate those strategies into tactical implementations with measurable revenue streams. Our client base has continued to expand with very high penetration rates in the markets in which we operate. Thus, we have experienced a trend of becoming longer term strategic partners with our clients.

        Another component of our Revenue EnhancementRevE offering is our CVE solutions that includes EnActinclude software, proprietary sales management methodologies and sales training programs. Our CVE solutions assist financial institutions in leveraging central intelligence with local insight.insight, translating strategy into specific actions to achieve sustained organizational performance. This enables our clients to recognizeimprove their identification of those customers and prospects representing the greatest value or potential.potential, while aligning internal processes and behaviors with management's focus. Our approach is unique and complementary to many CRM investments that banks have made in recent years and is designed to focus their activities such that they can actually attain increased returns on these CRM investments.

        Global Payments Consulting.    Our Global Payments Consulting (GPC)("GPC") division helps financial institutions proactively plan, prepare and optimize for the regulatory, competitive and technological impacts affecting the financial payments environment. The division provides strategic planning, program management, specialized tools, business applications and implementation advisory services for financial institutions and otherspecialized payments clients. These planning and implementationThe focus areas for these services include:

•

Enterprise payment strategyrationalization (strategy through performance optimization)



•

Payment researchTransaction/payment transformation services (research, planning, process design, implementation support, etc.)



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Predictive financial and operational modeling of the implications of payment trends and strategies



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Image-enabled payment infrastructure planning



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Transportation,Transaction clearing optimization solutions (transportation, float, clearing form, clearing partners and funds availability optimizationoptimization)



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Consolidation and merger/integration planning



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Program ManagementPayment channel risk mitigation



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Enterprise RiskImage exchange planning



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Strategic Sourcing evaluation



•

Issue Recovery Services

        The GPC division also contains the license, maintenance and services revenue of our for two product areas:

•

Float Management software products—Float Analysis System and Float Management System—for managing a bank's float through float analysis and pricing to improve profitability, reporting, workflow and check clearing operations. These products also provide critical activity summaries, aid in creating multiple availability and pricing schedules, and pinpoint the cost/profitability of transactions or relationships.

•

Payments Modeling product—PaymentsLink is an application that allows a bank to create an enterprise virtual profit and loss statement for the payments business as well as model business scenarios around product and service pricing and transactional volume trends.

        Outsourcing.    Carretek LLC is a transformational business outsourcer for payment and transaction processing jointly owned by Carreker Corporation (51%) and Majesco Software Inc. (49%), the U.S. subsidiary of Mastek Limited, a leading Indian outsourcing company with global operations. Carretek was formed in fiscal 2003. While the venture has signed its first contract, it is still in the developmental phase and its results are contained in the Corporate-Unallocated business segment.

        Carretek's mission is to enable financial institutions and their processors to realize the benefits of transformational offshore-centric outsourcing ("offshoring") of their business processes. The benefits to

clients could include reduction in operating costs, improvements in productivity, and enhancement of quality.

        Initially, Carretek is focused on offshoring payments-related business processes. Through Carretek, financial institutions can leverage the global work force at this critical period when Check 21 and other payment electronification trends are pressuring financial institutions to reduce their payment per item costs beyond the power of traditional cost management practices. Carretek has designed and built specific product offerings targeted at payment and transaction processing functions for this express purpose. Within this area of expertise, the Carretek offering includes a flexible array of offshore outsourcing services to financial institutions.

The Carreker Solution

        The products and services offered by our divisions are designed to address our clients' needs to adapt to an ever-changing landscape in the payments businesses for financial institutions. These solutions combine consulting and professional services with software applications to enable financial institutions to identifydesign and implement payment solutions, increase revenues, reduce costs and enhance delivery of customer services. The key characteristics of our solutions include:

        Integrated and Consultative Approach.    We combine our consulting expertise and software applications to serve as a single-source provider of fully-integrated payments solutions. This approach sets us apart from providers of partial solutions that require financial institutions to seek multiple solution providers and costly additional expertise or implementation services to attain a complete solution. By offering this integration, we can streamline the buying decisions, simplify the implementation efforts and accelerate results when compared to a multiple supplier approach.

        Comprehensive Delivery Model.    We deliver our software and consulting solutions in a variety of delivery models to meet our clients' specific needs. These delivery methods include strategic stand-alone consulting, traditional software licensing and associated consulting,professional services, third party web-hosting and licensing software for use by multiple banks in a shared operating environment. Our ability to deliver products and services in a variety of methods allows us to provide solutions to a wider range of clients.

        Compelling Business Proposition for Clients.    Our solutions reduce investment risk for our clients by increasing revenues or reducing costs in a concrete and measurable way and in a relatively short period of time. In addition, in appropriate circumstances, we value-price certain of our solutions, whereby we receive a percentage of the amount of additional revenues or reduced costs achieved by the customer. These arrangements allow banks to fund their investments in our solutions with the benefits derived from their implementation.

        Broad Array of Services and Technology.    We believe that ourOur offerings provide the broadesta broad footprint of solutions from a single supplier of payments solutions into the banking industry. This array of products enables us to provide a financial institution with a very targeted solution for a narrow area of its operations or to address a broad range of its operational requirements.

Our Market

        Carreker's direct market is the financial services industry. Within that huge sector, we focus mainly on large banks and mainly in the U.S. However, our market also includes:

•

Non-banks, mainly in the form of companies that provide processing and related services to banks



•

Banks below $5 billion in assets, especially for certain products as detailed previously in the Products and Services section

•

Banks in other countries, especially where English is the first language, although thatlanguage is becoming less of a factor over time



•

Other financial services companies with needs similar to banks, such as credit unions, insurance companies and cash handling companies, etc.



•

Customers of banks that will increasingly use our technology as it is imbedded in the banks' customer offerings

        At present, we serve all of the top 20 banks in the U.S., plus 75 of the next 100 banks, and many smaller banks. We also serve the six largest financial institutions in Canada, 75% of the largest banks in the UK, the four largest in the UK, the two largest in Ireland, the fivesix largest in Australia and New Zealand, and three of the four largest in South Africa. We have a smalleran emerging presence in other European and Latin American countries.

        Most of the major bank processing companies are our clients, and we have alliance and/or reseller relationships with many of them to maximize distribution of our products and services.

        Banks are expected to continue spending heavily on Information Technology ("IT") this year. TowerGroupyear as indicated in the chart below.

IT Spending By North American Banks

Source: A North American Perspective: IT Spending at U.S. and Canadian Banks—Celent both forecast approximately a four percent increase. According to Celent, "Areas such as security, payments, multi-channel integration, and branch automation will be highlighted in 2005, as banks push towards increasing strategic investments in new technology."(February 2005)

        Significant new regulatory, competitive, technological, human capital and behavioral forces are acting on the payments industry now in ways that seem likely to impact virtually all participants in this market space. The forces include the following:

        Regulatory Change.    There are a number of legislative and regulatory changes impacting the form, structure, process and controls around paper, electronic and currency-based financial payments. We believe financial institutions around the world will need to invest in the understanding, planning and implementation activities related to these changes. Three of the more important areas of legislative/regulatory changeschange to note are as follows:

•

Check Clearing for the 21st Century Act, more commonly referred to as Check 21—This piece of U.S. legislation was signed into law October 28, 2003 and came into effectbecame effective in October of 2004. This legislationCheck 21 provides an important new impetus to the practice of exchanging check ‘images,‘ in lieu of actual checks. We believe the effect of this legislation will be potentially to increase market demand for our check imaging, remote deposit capture, substitute checks, image quality, electronic check presentment, and image back office products and we are actively positioning those products accordingly.



•

USA Patriot Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 or USAPA)Patriot Act)—This U.S. legislation was signed into law in late October 2001 following the terrorist acts of 9/11. The USAPAPatriot Act made significant amendments to over 15 important statutes. Regulations under USAPAthe Patriot Act were issued in 2003 and are now in effect at all U.S. financial institutions. The law imposes new regulatory duties upon financial institutions to help prohibit and detect the financing of terrorism through money laundering by requiring the adoption of enhanced procedures by financial institutions. These procedures require the gathering and retention of information to establish and verify the true identity of financial institution customers.customers and other additional anti-money laundering procedures. We are working now to incorporatehave incorporated enhanced anti-money laundering detection and compliance technologies into our fraud mitigation suite of software products.



•

New Basel Capital Accord (also known as Basel II)—The Basel Accord is intended to be available for implementation in member countries by the end of 2006 with full implementation by January 2008. The goal of these revisions is to put a new capital adequacy framework in place for banks around the globe along two important dimensions. First, by developing capital regulations that encompass minimum capital requirements, supervisory review and market discipline. Second, by increasing substantially the risk sensitivity of the minimum capital requirements and by modifying the definition of risk-weighted assets to change the treatment of

credit risk and to introduce explicit treatment of operational risk. These changes will stipulate significant new capital and operational risk management requirements for banks. Whether in terms of new redundancy requirements for payments infrastructure or new business continuity practices for banks, we believe additional opportunities to leverage our technology and our operations consulting expertise may result from banks' efforts to achieve compliance.

        Disintermediation of the Financial Institution.Institution Role in Payments.    We believe the market share of financial institutions in the payments business has been declining over the last 20 years as new non-bank providers offer a competitive alternativealternatives to banks as financial intermediaries. We believe financialFinancial institutions are intimately aware of this trend and its implications on the positioning offor their client relationship,relationships, their value proposition,propositions, their revenues and their profits. We believe these financialFinancial institutions are and will be developing and executing strategies to protect and expand their market share of the payments business by investing in new value propositions, new products and new services in various payment arenas.

        Convergence of Payment Vehicles.    We believe that the front-end and the back-end of the presentment, processing and settlement aspects of the paper and electronic payment types will converge driven by customer demand and delivery efficiency. Although we believe the total number of payment transactions will increase for the foreseeable future, we believe paper-based payments will decline in number with the increase in electronic payments more than offsetting this decline. We believe over time the systems and operations infrastructure for payments, which is in silos today by payment type, will tend to converge and result in next generation payment technologies that will need to be developed. These technologies will be more real-time than traditional batch technologies. Straight through processing service offerings will be specifically tailored to communities of interest (e.g. casinos, healthcare or small retail) and payment related information services (e.g. loyalty programs and cross-sell programs) will be developed.

        Mergers and Consolidations.    Mergers and consolidations of financial institutions have been on the rise in the US recently. We believe these mergers will result in significant investments in business, system and operations integration for long-term shareholder value. We believe consulting and software solutions supporting the integration activities of the surviving financial institutions will be important offerings in the future.

Electronification.    Technologies for electronification of check workflows continue to be refined and to gain further industry adoption. Many of our key customers are defining strategies now for the electronification of checks at the earliest point of receipt and for exchanging images between banks as a basis for financial settlement. Such practices would significantly reduce check-related operating expenses for banks and position banks to deliver more robust payment services to their customers. We believe we are positioned, through our broad suite of check imaging products, to benefit from the continued adoption of check imaging.

        At the same time, practices are emerging for conversion of checks at the point of sale or at lockbox processing locations to alternative electronic payment types, such as ACH or debit transactions. In these cases, transactions are less likely to be processed through Carreker's current suite of technology solutions. We are developingcontinuing our development of enhancements to selected products that will address these electronic payment types.

        As a third point, integration Integration between banks and the point of salepayment transaction or origination will increasingly lead to more real time verification and guarantee of transactions at the point of sale.payment

transactions. We are engaged now with key customers and partners in trying to define next-generation fraud mitigation solutions, and see this as an area of opportunity for technology growth.

        Importance of Fraud/Risk Mitigation.    We believe transaction fraud losses have continued to increase for financial institutions and their customers as electronic payment vehicles have grown in

availability and adoption. Further, we believe compliance costs and penalties for non-compliance with new regulations designed to mitigate global risks through controls on electronic and currency-based financial transactions will continue to increase. We believe significant investments in processes, procedures and technologies will continue to be made to detect and prevent fraud losses and improve compliance, while minimizing the intrusion of controls on customer activities.

        Convergence of Payment Vehicles.    We believe that the front-end and the back-end of the presentment, processing and settlement aspects of the paper and electronic payment types will converge, driven by customer demand and delivery efficiency. We believe paper-based payments will decline in number, and that the increase in electronic payments will more than offset this decline. We believe that over time the separate systems and operations for different payment types will tend to converge and result in next generation payment and synergistic technologies yet to be developed. These technologies will be more real-time than traditional batch technologies. Straight through processing service offerings will be specifically tailored to communities of interest (e.g. casinos, healthcare or small retail), and payment related information services (e.g. loyalty programs, spend management and cross-sell programs) will be developed.

        Globalization of Payments Work.    As the important work of processing payments becomes more electronic, the opportunities for financial institutions to leverage workforces around the world to achieve cost and quality advantages will proliferate.proliferate, and we have demonstrated expertise and success in this arena. We believe financial institutions will gradually at first, and more rapidly later, source and process components of their payments work in secure, low cost countries around the globe. We are already seeing a significant growth in the awareness of the importance of strategic sourcing and a lessening of the social and political obstacles to offshoring.

Customers

        A majority of our revenues are generated from contracts with banks maintaining assets in excess of $5.0 billion. We currently provide services or products to each of the 20 largest banks in the United States,U.S., as measured by total assets by Sheshunoff Information Services. Our five largest customers accounted for approximately 31%36%, 28%31% and 34%28% of total revenues during the fiscal years ended January 31, 2006, 2005 2004 and 2003,2004, respectively. Wells Fargo accounted for approximately 13% of total revenues during the year ended January 31, 2006, and accounted for approximately 14% of total revenues during the year ended January 31, 2005. No single customer accounted for more than 10% of total revenues during the year ended January 31, 2004. U.S. Bank, N.A. accounted for approximately 10% of total revenues during the year ended January 31, 2003. Please see Note 11 of our Notes to Consolidated Financial Statements for further information about our non-U.S. customers.customers and markets.

Solutions Development

        Our solutions development activities focus on identifying specific bank and end user needs and the shared needs of the banking industry, prototyping and developing promising applications, test marketing new products, developing sales strategies and coordinating distribution and on-going maintenance for each of our solutions. In certain instances, we have contracted with third party software development companies to develop our solutions.

        We frequently receive customer requests for new services and/or software. We strive to develop solutions in response to these requests and historically have been able to partner with our customers and share some or all of the development costs. In addition to customer-funded solutions development,

we have invested significant amounts in solutions development, including expenditures (inclusive of amounts capitalized) of $10.4 million, $11.2 million, $8.5 million, and $11.4$8.5 million for research and development in the years ended January 31, 2006, 2005 2004 and 2003,2004, respectively. Further, some of our key product introductions have resulted from the adaptation of products developed for customers to address a wider market. In exchange for either a one-time payment and/or on-going royalties, we are often able to obtain the right to develop, enhance and market these modified products.

Technology

        Our software products incorporate open systems architecture and protocols to provide scalability and functionality to interface with a bank's current and legacy systems. Our core proprietary technologies, for both our client/server and mainframe software products, are primarily directed at using a standard set of components, drivers, and application interfaces, andwhile leveraging the quality and productivity benefits of reusable component development.

        Many of our newer products operate on Windows or Unix platforms, support industry-standard Web browsers such as Microsoft Internet Explorer and AOL Netscape, and databases such as Oracle, DB2, or SQL, and can be delivered as an Application Service Provider ("ASP") or standard packaged product.

        We continue to enhance our second-generation computer systems, which are primarily IBM mainframe-based or client server applications, and use common computer tools to integrate the data from these computer programs into our new products.

Sales and Marketing

        We have developed strong relationships with many senior bank executives as a result of our delivery of solutions to many of the largest banks in the United States for over 2728 years. As of January 31, 2005, we had 14We leverage an Account Relationship Managers who are responsiblemodel for managing our day-to-daylargest customer relationships with our customers. 13 are responsible forin North American bank relationships, and 1 is responsible for the International bank relationships.America. Our Account Relationship Managers' responsibilities include identifying customers' needs and assisting our business unit teams in presenting their solutions and concluding sales. Our Account Relationship Managers work closely with our executive officers, some of whom serve as Executive Relationship Managers to our customers. We also employ applicableleverage business segmentunit sales and technical sales support staff, who are familiar with our technology and who participate in opportunitiesspecific solutions to sell technology-based solutions.drive the bulk of the respective solutions sales process.

        We derive a significant portion of our business through existing customers and customer referrals. In addition, we market our services through a variety of media, including:

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our web site;



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direct mail;



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user conferences conducted exclusively for our customers and qualified prospects;



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participation in industry conferences and trade shows;



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publication of "white papers" related to specific aspects of our services;



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customer newsletters; and



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informational listings in trade journals.

        AsBacklog

        At the end of January 31,fiscal 2005, we employedour backlog was $63.6 million, including deferred revenues of $19.2 million. At the end of fiscal 2004, our backlog was $63.2 million, including deferred revenue of

$24.2 million. We do not believe that backlog is a marketing staffmeaningful indicator of 8 individuals, including graphics designers, writers, administrative coordinatorssales that can be expected for any period, and a Web master.there can be no assurance that backlog at any point in time will translate into revenue in any subsequent period.

Competition

        We operate in a highly competitive and rapidly changing global marketplace and compete with a variety of organizations that offer products and services competitive with those we offer. In our consulting and revenue enhancement businesses our clients retain us on a non-exclusive basis. In addition, a client may choose to use its own resources rather than engage us for these consulting services. Our competitors in the consulting business space include strategic consulting firms and full-service consulting services, as well as niche consulting providers. Increasingly, the global information technology service firms are offering a full range of consulting services. Further, the niche financial institution processing companies are increasingly creating and offering consulting services as an additional value-added service to their IT processing offerings. In the Revenue Enhancement business our competitors are almost exclusively niche providers that are typically small and medium-sized private organizations. However, we also face competition from bank internal revenue enhancement departments. In our Carretek business line, we primarily compete against large global outsourcing providers and our customers' internally built and operated alternatives.

        In our global payments technology business segment, our competitors are generally the global information technology service firms and the smaller niche application providers. In each of our major software product suites a range of competitors exists. The global IT services firms compete in some of our software product suites. At the same time, differing groups of application and niche application

competitors focus on one or more of our other product suites. Some of these competitors have significantly greater financial, technical, marketing and other resources than we do.

        In addition to competing with a variety of third parties, we experience competition from our customers and potential customers when they develop, implement and maintain their own services and applications. In addition, customers or potential customers could enter into strategic relationships with one or more of our competitors to develop, market and sell competing services or products.

Government Regulation

        Our primary customers are banks. Although the services we currently offer have not been subject to any material industry-specific government regulation, the banking industry is heavily regulated. Our products and services must allow our banking customers to comply with all applicable regulations, and as a result, we must understand the intricacies and application of many government regulations. The regulations most applicable to our provision of solutions to banks include regulations governing information and data security of customer accounts, establishing minimum reserve requirements, governing funds availability and the collection and return of checks, and establishing rights, liabilities and responsibilities of parties in electronic funds transfers. For example, some of our consulting services assist banks with minimizing their reserves while complying with requirements of the Board of Governors of the Federal Reserve System ("Federal Reserve"). In addition, the expedited availability and check return requirements imposed by funds availability regulations have increased fraud opportunities dramatically, and our Global Payments Technologies products and services address this concern while complying with such regulations.

        While we are not directly subject to the federal orand state regulations specifically applicable to financial institutions, such as banks, thrifts and credit unions, the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, and various state regulatory authorities typically assert the right to observe the operations of companies to which certain functions of financial institutions (such as data processing) are outsourced. These regulators may from time to time also claim the right to observe the operations of

companies like us that provide software and other products or services to financial institutions. In addition, financial institutions with whomwhich we do business may from time to timeoften require, by contract or otherwise, that evaluations of our internal controls be performed by independent auditors or by the financial institutions themselves.

Proprietary Rights

        We rely upon a combination of patent, copyright, trademark and trade secret laws, including the use of confidentiality agreements with employees, independent contractors and third parties and physical security devices to protect our proprietary technology and information. We have a number of issued patents and registered trademarks and have filed applications for additional patents and trademarks in the United States. We defend our proprietary rights.

        We enter into invention assignment and confidentiality agreements with our employees and independent contractors and confidentiality agreements with certain customers. We also limit access to the source codes for our software and other proprietary information. We believe that due to the rapid pace of innovation within the software industry, factors such as the technological and creative expertise of our personnel, the quality of our solutions, the quality of our technical support and training services and the frequency of release of technology enhancements are important to establishing and maintaining a technology leadership in addition to the various legal protections available for our technology.

        We are not aware that we are infringing on any proprietary rights of third parties. We rely upon certain software that we license from third parties, including software that is integrated with our internally developed software and used in our solutions to perform key functions. We are not aware

that any third-partythird party software being re-sold by us is infringing upon proprietary rights of other third parties.parties and have proper indemnities in place to mitigate our risk.

Employees

        As of January 31, 2005,2006, we had 541495 employees. Of theseThese employees 106 provided consultingare broken down into the following categories: Global Payments Technologies ("GPT") had 284 employees, Revenue Enhancement ("RevE") had 86 employees, Global Payments Consulting ("GPC") had 23 employees, Carretek had 2 U.S. based employees (along with 121 offshore personnel of Mastek Limited that perform services 212 provided technologyfor Carretek on a contract basis), Corporate Sales and implementation functions, 114 performed salesMarketing had 18 employees, and marketing, product management, customer relationsCorporate Staff which includes Executive Management, Legal, Finance and business development functionsAccounting, Human Resources, Facilities and 109 persons performed corporate, finance and administrative functions.IT had 82 employees. We have no unionized employees, and we believe that our employee relations are good.

Executive Officers of the Company

        The following table sets forth information regarding the Company's current executive officers.

John D. Carreker, Jr. has served as Chairman of the Board of Directors and Chief Executive Officer since the Company's formation in 1978. John D. Carreker, Jr. and James D. Carreker, a director of the company, are brothers. John D. Carreker III is the son of John D. Carreker, Jr.

        Lisa K. Peterson has served as Executive Vice President, Treasurer and Chief Financial Officer since October 2003. From August 1999 to February 2003, Ms. Peterson served as Chief Financial and Administrative Officer for Monarch Dental Corporation, a dental group practice management company. Prior to that time, Ms. Peterson served as Chief Financial Officer for Viacom Retail Stores, Inc., a start-up division of Viacom, Inc. For the six years prior to that time, Ms. Peterson worked for Pearle Vision, Inc. in various capacities culminating in the position of Vice President and Controller.

        John D. Carreker III has served as Executive Vice President and President, Global Payments Technologies since November 2002. Since June 1991, Mr. Carreker has served in various management positions with the Company. John D. Carreker III is the son of John D. Carreker, Jr. and the nephew of James D. Carreker.

        Michael J. InmanJohn S. Davis has served as Executive Vice President, General Counsel and Secretary to the Company since June 2005. From June 2004 to June 2005, Mr. Davis was engaged in private legal practice. Prior to that time, he served as Senior Vice President and General Counsel of Relationship Management since September 2002Dave & Busters, Inc., a restaurant and entertainment company for three years, and as Vice President & General Counsel of Cameron Ashley Building Products, Inc., a corporate officer since December 2004.building products distributor, for seven years. Prior thereto, Mr. Inman has been with the Company for ten years in various management and consulting roles.Davis served as Associate General Counsel of Electronic Data Systems Corporation ("EDS"), a global information technology service company.

        Suzette L. Massie has served as Executive Vice President and President, Global Payments Consulting since December 2004. ForDuring the last five years,year period prior to joining the Company, Ms. Massie was a partner with Accenture, a global management consulting company in the Financial Services practice focusing on Top 20 Banks in the U.S.

        Robert M. Olson, Jr.    has served as Executive Vice President since July 1998 and as President and CEO of Carretek since October 2004.

        Blake A. Williams has served as Executive Vice President and President, Revenue Enhancement since November 2002. Mr. Williams has been with the Company for 14 years in various management and consulting roles.

Tod V. Mongan has served as Senior Vice President and Secretary since December 2001 and as General Counsel to the Company since February 2001. For the five years prior to that time Mr. Mongan served as Senior Vice President, General Counsel, Secretary and Chief Administrative Officer for BancTec, Inc., a worldwide systems integration, manufacturing and services company.

Forward Looking Statements and
Item 1A. Risk FactorsFactors.

Forward Looking Statements

        Statements in this Report and the Annual Report to the Stockholders that are not purely historical facts including statements about our expected future financial position, sales, results of operations, cash flows or backlog as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "should," "could," "goal," "target," "designated," "on track," "comfortable with," "optimistic" and other similar expressions, constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results and the timing of some events could differ materially from those projected in or contemplated by the forward looking statements due to a number of factors, including, without limitation, those set forth below and elsewhere in this Report. Readers are cautioned not to place undue reliance on forward looking statements, for no assurances can be given with respect to any forward looking statements. In addition to the other information in this Report, the following factors, which may affect our current position and future prospects, should be considered carefully in evaluating us and an investment in our common stock.

Risk FactorsBusiness Risks

        We desire to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Many of the following important factors discussed below have been discussed in our prior filings with the Securities and Exchange Commission. In addition to the other information in this report, readers should carefully consider that the following important factors, among others, in some cases have affected, and in the future could affect, our actual results and could cause our actual consolidated results of operations for the fiscal year ending January 31, 2007 (and the individual fiscal quarters therein) and beyond, to differ materially from those expressed in any forward-looking statements made by us, or on our behalf.

Risks Related to Our Business

Our performance depends on the banking industry, and any change in the banking industry's demand for our solutions could reduce our revenues and have a material adverse effect on our business.

        We derive substantially all of our revenues from solutions provided to banks and other participants in the banking industry. Accordingly, our future success significantly depends upon this industry's continued demand for our solutions. We believe that an important factor in our growth has been substantial changes in the banking industry in recent years, as manifested by continuing consolidation, regulatory change, technological innovation, the emergence of the Internet and other trends. If this environment of change were to slow, we could experience reduced demand for our solutions. In addition, the banking industry is sensitive to changes in economic conditions and is highly susceptible to unforeseen events, such as domestic or foreign political instability, recession, inflation or other adverse occurrences that may result in a significant decline in the utilization of bank services. Furthermore, due to concerns regarding data security and other factors, banks have been and may in the future be hesitantslow to adopt electronic solutions, which can adversely affect the demand for our solutions. Any event that results in decreased consumer or corporate use of bank services, or increased pressures on banks towards the in-house development and implementation of revenue enhancement or cost reduction measures, could have a material adverse effect on our business, financial condition and results of operations.

Our inability to respond to a decline in check volumes could reduce our revenues and have a material adverse effect on our business.

        We have in the past derived a significant portion of our revenues from check related products and services. A decline in check volumes could have a material adverse effect on our business. If banks and merchants decide to use pricing incentives to further stimulate a decline in check usage, this decline in usage could accelerate. Our future success depends on our ability to leverage existing competencies to support emerging payments types, and to define and develop new solutions addressing those payment types. If we are unable to capitalize on these competencies to generate new revenues to offset any loss

        As described under "Management's Discussion and Analysis of Financial Accounting Standards No. 142,GoodwillCondition and Other Intangible Assets ("SFAS 142"), effective for fiscal years beginning after December 15, 2001. Under SFAS 142, goodwillResults of Operations—Restatement" and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement. There can be no assurance that such tests will not result in a determination that these assets have been impaired. If at any time it is determined that an impairment has occurred, we will be required to reflect the impaired value as a charge resulting in a reduction in earnings in the quarter such impairment is identified and a corresponding reduction in the net asset valueNote 3 of the Company. The Company recorded a goodwill impairment charge of $46.0 million inNotes to Consolidated Financial Statements, we have restated our consolidated financial statements for the quarterly periodyear ended January 31, 2003. The fair values used in this evaluation were estimated based upon the consideration of a number of fair value estimation techniques including a discounted cash flow analysis2004 and consideration of the market price of the Company's stock. Goodwill that remains recordedour consolidated balance sheet at January 31, 2005 was $20.8 million. Declines in market conditions, increases in interest rates and changes in projections with respect to the Global Payments Technologies reporting unit in which goodwill is allocated could result in additional impairment charges in the future.

        In addition to the Goodwill discussed above, we have other intangible assets which are currently being amortized. These intangible assets are as follows:

•

Capitalized Software—We capitalize the development costs of software, other than internal-use software, in accordance with Statement of Financial Accounting Standards No. 86,"Accounting for Costs of Computer Software to2005. There may be Sold, Leased or Otherwise Marketed," ("SFAS 86"). Capitalized software that is recorded at January 31, 2005 was $3.2 million.



•

Acquired Developed Technology—Acquired developed technology includes purchased technology intangible assetsrisks associated with acquisitions. These purchased technology intangibles are initially recorded based on the fair value ascribed at the time of acquisition. The acquired developed technology that is recorded at January 31, 2005 was $9.9 million.

•

Customer Relationships—Customer relationships includes an intangible asset with a definite useful life. The customer relationship intangible that is recorded at January 31, 2005 was $3.3 million.

        Declines in both current and projected demand for our software product offerings could result in impairment charges in the future.

The ultimate realization of revenue from contracted sales, potential sales and backlog cannot always be predicted with a high degree of accuracy.

        From time to time management provides information regarding our contracted sales, potential sales and our backlog for contracted services, contracted contingent services, contracted licenses and contracted maintenance. Management also provides our expectations with regard to the realization of revenue from such contracted sales, potential sales and backlog. These expectations can be influenced by many factors, some of which are beyond our control, and include but are not limited to the following:

•

Customer buying decisions and implementation timelines and schedules



•

Customer budget cycles and priorities



•

Our ability to develop new technologies and services in a timely manner



•

Customer acceptancethis restatement of our new technologies or services



•

Receipt of cash payment

Changes in the Accounting Treatment of Stock Options and Other Share-Based Compensation Could Adversely Affect Our Results of Operations.

        We currently account for share-based payments to employees (which include stock options) using the intrinsic value method of APB No. 25, "Accounting for Stock Issued to Employees" and, as such, generally recognize no compensation cost for employee stock options. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004),"Share-Based Payments," ("SFAS 123(R)"). SFAS 123(R) requires companies to adopt the fair-value methodology of valuing stock options and other share-based compensation and recognize that valuation in theconsolidated financial statements from the date of grant. Adoption is required for all interim and annual periods beginning after June 15, 2005. This change in accounting treatment of employee stock options will likely have a material and adverse effect on our results of operations, as the share-based compensation expense will be charged directly against our earnings. Furthermore, adoption of SFAS 123(R) will require us to make certain assumptions and judgments in the valuation of stock options that we may grant in the future. A change in any of those assumptions or judgments could change the compensation expense that is charged against our earnings and, consequently, adversely affect our results of operations.

The ultimate resolution of the class action lawsuits may have a material adverse effect on our business.

        We are unable to predict or determine the final outcome of the class action lawsuits described under "Item 3. Legal Proceedings," and the effect of these proceedings on our financial results, our business or our management. In addition, it is not feasible to estimate the amounts or potential range of losses with respect thereto. The potential outcomes or resolutions of the class action lawsuits could include judgments against us or settlements that could require substantial payments bynegatively affect us. In addition, the timing of the final resolution of these matters is uncertain. We believe that material adverse outcomes with respect to the class action lawsuits could have a material adverse effect on our financial results, our business or our management.

We cannot predict every event and circumstance which may impact our business and, therefore, the risks and uncertainties discussed above may not be the only ones you should consider.

        The risks and uncertainties discussed above are in addition to those that apply to most businesses generally. In addition, as we continue to grow our business, we may encounter other risks of which we are not aware at this time. These additional risks may cause serious damage to our business in the future, the impact of which we cannot estimate at this time.

        Not applicable.

Item 2. Properties.

        Our principal executive office is a leased facility with approximately 72,433 square feet of space in Dallas, Texas. The lease agreement for this space expires on May 31, 2010. We also lease approximately 22,491 square feet in Memphis, Tennessee pursuant to a lease agreement which expires August 31, 2010; approximately 40,307 square feet in Charlotte, North Carolina pursuant to a lease agreement which expires December 31, 2008 and 4,111 square feet in London, England pursuant to a lease agreement which expires September 30, 2006. We believe that our facilities are well maintained and in good operating condition and are adequate for our present and anticipated levels of operations.

Item 3. Legal Proceedings.

Shareholder Derivative Suit.

        On June 15, 2004, by mutual agreement between the parties,Smith v. Carreker Corporation, et. al, Civil Action No. 303CV1211-M was reinstated in the United States District Court for the Northern District of Texas, Dallas Division. This action was originally filed on May 29, 2003, in the United States District Court for the Northern District of Texas, Dallas Division as Civil Action no. 303CV1211-D. On January 15, 2004, the Court, acting upon the joint motion of the parties, dismissed the action without prejudice. This action was brought as a shareholders' derivative action pursuant to Rule 23.1, Fed.R.Civ.P. for the benefit of Nominal Defendant Carreker Corporation against certain of its current and former officers and directors,i.e., John D. Carreker, Jr., James D. Carreker, Richard R. Lee, Jr., James L. Fischer, Donald L. House, David K. Sias, Terry L. Gage, James R. Erwin, Ronald G. Steinhart and Ronald Antinori, seeking to remedy their individual breaches of fiduciary duty, including their knowing violations of Generally Accepted Accounting Principles ("GAAP"), knowing violations of federal and state securities laws, acts of bad faith and other breaches of fiduciary duty. The plaintiff seekssought redress (the form of which includes, among others, unspecified amounts of compensatory damages, interest and costs, including legal fees) for injuries to the Company and its shareholders caused by Defendants' misfeasance and/or malfeasance during the period from May 20, 1998 through December 10, 2002. The District Court has preliminarily approved a settlement of the derivative claims brought in this action. Under the proposed settlement, the Company has agreed to adopt certain

        On June 2, 2003, incorporate governance enhancements and cover plaintiffs' counsel's attorney's fees and litigation expenses up to $300,000. Neither the Company nor any of its current or former officers and directors made any admission of wrongdoing. When the settlement is approved by the Court and is made final, the derivative litigation against the Company's current and former officers and directors will be terminated. A final settlement hearing will be scheduled before the District Court Dallas County, Texas, Walter Evans brought a shareholders' derivative action, for the benefitpurpose of Nominal Defendant Carreker Corporation against James D. Carreker, John D. Carreker, Jr., James R. Erwin, James L. Fischer, Michael D. Hansen, Donald L. House, Richard R. Lee, Jr., David K. Sias, Ronald J. Steinhart,determining whether the proposed settlement should be approved as fair, reasonable and Ernst & Young, LLPadequate. The settlement is subject to conditions, including final court approval. At this time, there can be no assurance that those conditions will be met and Carreker Corporation, Nominal Defendant (Cause No. 0305505). The complaint alleges that the director defendants breached their fiduciary duty to the company. In addition the complaint makes certain allegations against the Company's independent auditors Ernst & Young LLP. The complaint seeks unspecified amounts of compensatory damages, as well as interest and costs, including legal fees from the director defendants.settlement will receive final court approval.

Shareholder Class Action.

        On April 16, 2003 the United States District Court for the Northern District of Texas, Dallas Division, issued an order consolidating a number of purported class action lawsuits against the Company, John D. Carreker Jr. and Terry L. Gage into a Consolidated Action styledIn re Carreker Corporation Securities Litigation, Civil Action No. 303CV0250-M. Also, on March 3,On October 14, 2003 Claude Alton Coulterthe plaintiffs filed a purported class action lawsuit (Civiltheir Consolidated Class Action No. 503-CV-5-Q) against the Company, John D. Carreker Jr. and Terry L. Gage in the United States District Court for the Eastern District of Texas, Texarkana Division. These complaints,Complaint. The complaint, filed on behalf of purchasers of the Company's common stock between May 20, 1998 and December 10, 2002, inclusive, allegealleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 against all defendants (the Company, John D. Carreker Jr., Ronald Antinori, Terry L. Gage and Ernst & Young, the Company's auditors), violations of Section 20(a) of the Exchange Act against the individual defendants. These complaintsdefendants, and violation of Section 20A of the Securities Exchange Act against defendants John D. Carreker, Jr. and Ronald Antinori. The complaint also allege,alleges, among other things, that defendants artificially inflated the value of the Company'sCarreker stock by knowingly or recklessly misrepresenting the Company's financial results during the purported class period. On March 22, 2005 the Court dismissed the action without prejudice and allowed the plaintiffs 60 days in which to file an amended complaint. Also the Court dismissed, with prejudice, all claims by shareholders relating to periods prior to July 31, 1999.

        On May 31, 2005, the plaintiffs filed an Amended Consolidated Class Action Complaint on behalf of purchasers of the Company's common stock between July 30, 1999 and December 10, 2002, inclusive, which reiterates the allegations in the first complaint, and alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 against all defendants (the Company, John D. Carreker Jr., Ronald Antinori and Terry L. Gage) except Ernst & Young LLP, violations of Section 20(a) of the Exchange Act against the individual defendants, and violations of Section 20A of the Securities Exchange Act against defendants John D. Carreker, Jr. and Ronald Antinori. The plaintiffs are seeking unspecified amounts of compensatory damages, interest and costs, including legal fees.

        On March 22, 2005,April 21, 2006, counsel for the plaintiffs and defendants executed and submitted to the Court dismissed claimsa stipulation of settlement whereby they have agreed to settle the class action litigation for a payment of $5,250,000. The proposed settlement is subject to final court approval. At this time, there can be no assurance that the settlement will receive final court approval.

        The proposed settlement payments in both the shareholder derivative suit and the class action are fully covered by purchasers of the Company's common stock prior to July 30, 1999.

        The Companydirectors and individual defendants deny the allegations in these complaints and intend to defend themselves vigorously. It is not possible at this time to predict whether the Company will incur any liability or to estimate the damages, or the range of damages, if any, that the Company might incur in connection with these lawsuits. The ultimate resolution of these lawsuits could have a material adverse effect on the Company's business, results of operations, financial condition and cash flows.officer's insurance policies.

        The Company is periodically involved in various other legal actions and claims which arise in the normal course of business. In the opinion of management, the final disposition of these matters areis not expected to have a material adverse effect on the Company's financial position or results of operations.

Item 4. Submission of Matters to A Vote of Security Holders.

        No matter was submitted to a vote of our stockholders during the quarterly period ended January 31, 2005.2006.

PART II

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

        Our Common Stock has traded on the NASDAQ National Market under the symbol "CANI" since May 20, 1998, the date of our initial public offering. At March 31, 2005,2006, there were approximately 413883 record holders (388 are employees holding restricted common shares) of our Common Stock, although we believe that the number of beneficial owners of our Common Stock is substantially greater. The table below sets forth for the fiscal quarters indicated the high and low closing prices for the Common Stock, as reported by the NASDAQ National Market.

(1)

On March 31, 2005 the closing price for our Common Stock was $5.61 per share.

        We have not paid a cash dividend on shares of our common stock since our incorporation. We currently intend to retain our earnings in the future to support operations, and finance our growth and therefore,possibly to repurchase some shares of our common stock. Therefore, we do not intend to pay cash dividends on the common stock in the foreseeable future. Any payment of cash dividends in the future will be at the discretion of the board of directors and subject to some limitations under the Delaware General Corporation Law. However, our revolving credit agreement, which is described in Note 45 of our Notes to Consolidated Financial Statements, currently prohibits the payment of any cash dividends without approval from the banks from whichwith whom we entered into the revolving credit agreement was entered into.agreement.

        Please see "Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" for information about our equity compensation plans.

        Under a share repurchase program approved by the Board of Directors of Carreker Corporation on April 18, 2005, the Company was authorized to repurchase up to $5.0 million of its common stock through October 14, 2005. The repurchase program was designed to comply with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934 under which an agent appointed by the Company determined the time, amount, and price at which purchases of common stock would be made, subject to certain parameters established in advance by the Company. The Company purchased $3.2 million of

its common stock under the program, which expired on October 14, 2005. The repurchases are reflected in the following table:

(1)

The program expired on October 14, 2005.

Item 6. Selected Financial Data.

SELECTED CONSOLIDATED FINANCIAL DATA

        The following consolidated statements of operations data for each of the three years in the period ended January 31, 20052006 and the consolidated balance sheet data as of January 31, 2005 and 20042006 have been derived from our audited consolidated financial statements which are included elsewhere in this Report. As a result of the restatement of our consolidated financial statements as of January 31, 2005 and 2004 and for the year ended January 31, 2004, the indicated data set forth below has been restated from that which was reported previously in the Company's reports on Form 10-K for these periods. See Note 3 of the Notes to Consolidated Financial Statements. The consolidated balance sheet data as of January 31, 2003 2002, and 2001,2002, and the consolidated statement of operations data for the years ended January 31, 20022003 and 2001,2002, have been derived from our audited consolidated financial statements not included in this Report. The selected financial data set forth below should also be read in conjunction with "Management's

"Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Report.

(1)

See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Restatement" and Note 3 of the Notes to Consolidated Financial Statements for information regarding restatement of the financial statements and related financial information.

(2)

On June 6, 2001, we completed the acquisition of Check Solutions Company, a New York general partnership ("Check Solutions"). The operating results of Check Solutions are included in our results of operations from the date of acquisition.

(2)(3)

These costs are summarized below (in thousands):

During the quarterly period ended July 31, 2001, in connection with our periodic impairment review of our portfolio of software products, the Vault software acquired in the X-Port business combination in May 2000 was deemed to be impaired. Based on our calculation of the expected cash flows of the product, a $2.9 million non-cash charge was recorded. The charge resulted from the loss of two key transactions and the projected changes in the approach to selling and delivering the software and related services under a time or usage model.

Effective March 31, 2001, we entered into an alliance with Exchange Applications, Inc. ("Xchange"). As part of this alliance we became the exclusive provider of the EnAct customer relationship software and methodology to the banking industry. Under the EnAct agreement, we became obligated for guaranteed royalty payments of $12.5 million. Based on our periodic evaluation of the future cash flows associated with this product, a liability for the remaining $2.5 million obligation was accrued at October 31, 2001, and the carrying value of the prepaid software royalties, at that time, of $9.6 million was reduced to zero. This resulted in a charge of $12.1 million to costs of revenue during the quarterly period ended October 31, 2001.

During the quarterly period ended January 31, 2003, in connection with our periodic impairment review of our portfolio of software products, the eiManager product acquired in the AIS business combination in January 2000 was deemed to be impaired. Based on the Company's calculation of the expected future cash flows of the product, a $586,000 non-cash charge was recorded.

Effective June 2001, we entered into a software license agreement with Actuate Corporation in which the Company would integrate Actuate Corporation's software with our Global Tracking and Cash Solutions within the Global Payments Technologies business segment. We prepaid $400,000 for 40 copies of the software.

Based on the expected sales forecasts of this product a $368,000 non-cash charge was recorded in the quarterly period ended January 31, 2003.

(3)(4)

The provision (benefit) for income taxes is based on the estimated annual effective tax rate, and includes federal, state and foreign income taxes. In fiscal 2005 and 2004, the majority of our tax provision consisted of foreign taxes incurred that could not be offset with U.S. tax benefits. Our effective income tax rate was 5.1% in fiscal 2003, 4.2% in fiscal 2002 and 3.3% in fiscal 2001 and 38.0% in fiscal 2000.2001. The lower tax rate in fiscal 2003 was primarily due to net operating loss carryforwards offsetting the taxable income generated. The lower tax rate in fiscal 2002 and 2001 was due to losses we incurred from which we have not yet obtained a tax benefit.

On March 7, 2002, the federal tax law changed to allow net operating losses for taxable years ended in 2001 and 2002 to be carried back an additional three years. The impact from this change in tax law, including any reduction in the valuation allowance as a result of the expanded carryback period, was reflected in our tax provision for the quarterly period ended April 30, 2002. This resulted in a tax benefit of approximately $1.9 million in fiscal 2002 which was partially offset by state and foreign taxes.

At January 31, 2005,2006, we had available net operating loss carryforwards of approximately $33.1$34.0 million, of which begin to$5.7 million expire in 2022.2023 and $28.3 million expire in 2024.

(4)(5)

During the fourth quarter of the year ended January 31, 2003, the Company performed its annual evaluation for goodwill impairment resulting in a charge of $46.0 million. The impairment charge was recorded to the Global Payments Technologies ("GPT") segment as all of the Company's goodwill has been assigned to the GPT segment.

(5)(6)

A complete description of the Restructuring and other charges for the years ended January 31, 2006, 2005 2004 and 20032004 is contained within Item 7 Management's"Management's Discussion and Analysis of Financial Condition and Results of Operations." The Restructuring and other charges for the year ended January 31, 2003 and 2002 related to our acquisition of Check Solutions, can be summarized as follows (in thousands):

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The following discussion contains forward looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward looking statements as a result of various factors, including those set forth under "Business—Forward Looking Statements and Risk"Risk Factors," elsewhere in this Report or in the information incorporated by reference in this Report. You should read the following discussion and analysis in conjunction with "Selected Consolidated Financial Data" included in this Report, as well as our consolidated financial statements and related notes thereto appearing elsewhere in this Report.

        Our fiscal year ends on January 31. References contained in this Report to a given fiscal year refer to the twelve-month period ended January 31 of the succeeding year. For example, our fiscal year ended January 31, 20052006 is referred to in this Report as "fiscal 2004.2005."

Overview

        For the last 27 yearsSince 1978, Carreker Corporation has designed, developed, sold and delivered payments-related software and consulting solutions to financial institutions and financial service providers. More recently, we have introduced a business process outsourcing solution to our customers. Our products and services address a broad spectrum of payment activities and are designed to help our clients enhance the performance of their payments businesses; improve operational efficiency in payments processing; enhance revenue and profitability from payments-oriented products and services; reduce losses associated with fraudulent payment transactions; facilitate compliance with risk-related laws and regulations; and/or maximize clients' customer income streams by aligning their customer interactions and products with customer needs. Carreker employed a total of 495 employees at January 31, 2006.

        We are organized into three primaryfour business unit operating divisions: Global Payments Technologies ("GPT"), Revenue Enhancement ("RevE") and, Global Payments Consulting ("GPC"). and a Business Process Outsourcing business which is delivered through a majority-owned subsidiary named Carretek LLC ("Carretek") to address the payments outsourcing arena. These operating divisions are operated in discretedistinct yet increasingly synergistic ways to bring value to our clients. In addition we have established a joint venture named Carretek LLC to address the payments outsourcing arena.

        Global Payments Technologies.    This division is responsible for design, development, sales, and support of our technology solutions. The division has three lines of business with distinct solution offerings: Payments Solutions, Risk Solutions, and Cash & Logistics solutions. Revenue is primarily derived from license fees, implementation fees and maintenance fees. As of January 31, 2006, GPT had 284 employees.

        Revenue Enhancement.    This highly specialized practice groupdivision provides consulting and software solutions focused on increasing clients' revenue streams. Areas of expertise include fee income, market segmentation, management of customer price structures, account retention, account acquisitions and profitability. A majority of the revenue generated by this division is through benefit-sharing agreements with our customers, recorded as consulting revenue along with license fees, maintenance fees and implementation fees from our CVE software offering. As of January 31, 2006, RevE had 86 employees.

        Global Payments Consulting.    The objective of this professional services division is to provide our clients with "applied thought leadership" related to the business of payments. Revenue in the GPC division is primarily derived through the delivery of consulting services offered primarily on a time and materials basis to our clients, along with the license fees, maintenance fees and services fees associated with our Float Pricing System software offering and Payments Clearing Model product offering. As of January 31, 2006, GPC had 23 employees.

        Carretek.    In addition to these three divisions, in fiscal 2003 we formed Carretek LLC.Carretek. Carretek is a transformational business outsourcer for payment and transaction processing jointly owned by Carreker Corporation and Majesco Software, Inc., the U.S. subsidiary of Mastek Limited, a leading Indian outsourcing company with

global operations. As of January 31, 2006, Carretek had 2 U.S. based employees along with 121 offshore personnel of Mastek Limited which perform services for Carretek on a contract basis.

        Cost of Revenues and Gross Margins.    We strive to control our cost of revenues and thereby maintain or improve our gross margins. The major items impacting cost of consulting, cost of software maintenance and cost of software implementation are driven by personnel, overhead and related expenses. The major items impacting cost of software licenses are amortization of both capitalized and acquired software and also software royalties for software from third parties. While the amortization expense is relatively fixed, the third party royalty expense can vary significantly based on the relative product mix.

        Operating Expenses.    Operating expenses, including selling, general and administrative and research and development, are substantially driven by personnel and overhead expenses. Other significant operating expenses that we monitor include professional fees, use of contractors, travel, insurance and office services expenses. Additionally in fiscal 2004,As of January 31, 2006, the settlement ofCorporate Account Relationship Management and Marketing staff had 18 employees, and the EPG legal action along with associated legal fees was recorded on the RestructuringCorporate staff which includes Executive Management, Legal, Finance and Other Charges financial statement caption on the Consolidated Statement of Operations.Accounting, Human Resources, Facilities and IT had 82 employees.

        Liquidity and Cash Flows.    Cash and cash equivalents at January 31, 2006 and January 31, 2005 totaled $29.7 million and 2004 totaled $34.5 million, and $28.6 million, respectively. During fiscal 2004,In addition, we generated $15.3 million in cash from operating activities, used $5.9had $4.7 million of cash for investing activitiesmarketable debt securities at January 31, 2006, as compared to none at January 31, 2005. At January 31, 2006 and used $3.5 million for financing activities. Our primary utilization of cash in fiscal 2004 was to reduce our debt2005, there were no borrowings outstanding under our revolving credit agreement,agreement.

Restatement

        We have restated our consolidated financial statements for the year ended January 31, 2004, and our consolidated balance sheet at January 31, 2005, to investcorrect an error identified in deferred revenue resulting primarily from the duplicate recording of a customer software maintenance contract in connection with an accounting system conversion that occurred in October 2002. Based on our development lab infrastructure along withanalysis, software maintenance revenue related to this contract was erroneously recognized twice during the development costs associated with building several new product offerings, especially within our GPT business segment.year ended January 31, 2004. Therefore, the consolidated financial statements as of and for the fiscal year ended January 31, 2004 have been restated to reflect a $2.0 million reduction in software maintenance revenue, and the consolidated balance sheets at January 31, 2004 and 2005 have been restated to reflect a corresponding $2.0 million increase in deferred revenue and accumulated deficit.

Executive Summary

        In fiscal 2004, we generated revenueOur consolidated revenues declined 1.9% to $116.6 million in the year ended January 31 2006. We earned net income of $118.9$2.1 million andin the year ended January 31, 2006, compared to a net loss of $1.2 million. Through continuing efforts to improve qualitymillion in the year ended January 31, 2005. The increase in net income was primarily the result of increased consultant utilization and efficiency throughout the company, we generated $15.3 million of cash from operating activities during fiscal 2004. This cash flow allowed us to pay down the remaining $6.3 million of our $30.0 million revolving credit agreement, along with making several investments which enhance and expand our current product offerings. Additionally, we have upgraded both the hardware and software within our development lab in Charlotte, North Carolina.

        While we have made progress in reducing bothlowered our cost of revenues and SG&Aa reduction in restructuring and other charges. Our cash balance declined $4.8 million during the year ended January 31, 2006 due to our investment in $4.7 million of marketable debt securities. We also utilized cash to buy back 631,411 shares of our common stock for $3.2 million.

        The decline in our revenue was primarily associated with our GPT business segment. Revenue within this segment declined $3.3 million or 4.4% for the year ended January 31, 2006. The decline is primarily in software license revenue within the Payments group. The Payments group includes such products as Image Archive and Exception Management Applications as well as Source Capture, ExchgLink and Image Replacement Document ("IRD") solutions. The decline was primarily the result of continued technology investment delays by our customers and the intensification of competition in this particular space. Additionally, in the year ended January 31, 2005, the Payments group of GPT derived $3.4 million from a software license sale to a single customer of our legacy Check Image Archive product, while the year ended January 31, 2006 did not include any large single sales of this

magnitude. However, GPT's initial Source Capture installation was accepted by our customer and as a result, we recognized $1.6 million or 8.6% of software license revenue in the year ended January 31, 2006.

        In absolute dollars, our cost of revenues declined approximately $2.5 million in the year ended January 31, 2006, which allowed our gross margin percentage to increase to 50.5% as compared to 49.4% for the year ended January 31, 2005. Cost savings initiatives, primarily related to a reduction in personnel, resulted in both GPC's cost of consulting and GPT's cost of services being lower in the year ended January 31, 2006. Additionally, during the year ended January 31, 2006, we recorded $4.6 million of amortization of acquired developed technology within cost of revenues—software license. This amortization is primarily associated with the purchase of Check Solutions, Inc. in June 2001 and will be fully amortized in June 2007.

        Operating expenses includes selling, general and administrative, research and development, amortization of customer relationships and restructuring and other charges. These expenses declined approximately $2.8 million in the year ended January 31, 2006. Selling, general and administrative expenses have declined approximately $1.0 million for the year ended January 31, 2006. The reductions within selling, general and administrative were primarily related to cost savings from reductions in personnel in our profitability was hamperedcorporate sales function and D&O insurance costs. These reductions have been partially offset by the unfavorable jury verdict awarded to Earnings Performance Group ("EPG") in May 2004. The ultimate settlement andincreased legal fees, totaleddecreased bad debt expense recoveries and increased contract labor and professional fees associated with our ERP system upgrade, which began in the quarter ended April 30, 2005.

        In the year ended January 31, 2006, we recorded $918,000 of restructuring and other charges of which $780,000 was associated with the severance and other personnel costs for 29 employees terminated on August 31, 2005, primarily within the GPT business segment. The reductions were implemented in an effort to position GPT for improved long-term profitability. We expect an annual benefit of approximately $3.4 million.$2.4 million from this action. In addition,the year ended January 31, 2005, restructuring and other charges were $3.7 million and included a $1.7 million EPG litigation settlement, approximately $1.7 million of legal costs and $1.5 million of severance, which was partially offset by a $1.2 million reduction in our CheckFlow customer settlement reserve. In the same year, we increasedrecorded $1.4 million related to the amortization of customer relationships associated with the acquisition of Check Solutions, Inc. in June 2001. This customer relationship intangible will be fully amortized in June 2007.

        We continue to focus on increasing research and development, particularly within GPT, to enhance our levelexisting product offerings and develop new product offerings, and incurred research and development expenses of Research$9.6 million in the year ended January 31, 2006 compared with $8.6 million in the year ended January 31, 2005. In the year ended January 31, 2006, Source Capture along with several new Cash and Development expenses approximately $1.2 millionRisk solutions were introduced along with a Payments modeling product developed within GPC.

        We anticipate revenue growth during the year ended January 31, 2007 due to the availability and anticipated acceptance of several new products and service offerings that were developed during the year ended January 31, 2006 and from new products and services expected to be offered in the year ending January 31, 2007. However, due to a lengthened decision cycle associated with some of the new products, the growth in overall annual revenue is anticipated to be in the latter half of the year. We believe we are well positioned for profitability in the year ending January 31, 2007 as a result of the anticipated revenue growth coupled with ongoing cost containment efforts.

Results of Operations

Comparison of Year Ended January 31, 2006 ("Fiscal 2005") to Year Ended January 31, 2005 ("Fiscal 2004") and Year Ended January 31, 2004 ("Fiscal 2003")

Revenues

Revenues by Segment ($ in thousands):

        Our decline in total revenues of 1.9% in fiscal 2005, as compared to fiscal 2004, and the decline of 6.3% in fiscal 2004, as compared to fiscal 2003.2003, is concentrated primarily within the GPT segment.

        WithinThe decline in revenue within GPT that began in fiscal 2003 has carried through to fiscal 2005. The market's adoption of post-Check 21 related technology has been much slower than expected. We experienced isolated success with our Revenue Enhancement ("RevE")ExchgLink solution while our IRD authoring software and remote Source Capture have experienced greater success with several major banks and the Federal Reserve. For instance, GPT gained acceptance of its initial Source Capture installation and recognized $1.6 million of software license revenue in the quarter ended January 31, 2006. However, widespread adoption of our Check 21 product offerings, generally at smaller financial institutions, has progressed much slower than anticipated.

        Our RevE segment we experienced $1.8 million, or 5.5%, growth within ourrevenues were essentially flat in fiscal 2005, as compared to fiscal 2004, and declined 3% in fiscal 2004, as compared to fiscal 2003. In fiscal 2005, traditional RevE contingent consulting revenues; however, we experiencedrevenues declined $3.1 million, or 9.2%, due primarily to a decline of $2.7 million, or 57.9%,in consulting revenues in our foreign markets. This decline in consulting revenues was completely offset by an increase in software license and software implementation services within our Customer Value Enhancement ("CVE")CVE software and proprietary sales management revenue. Traditional consultingoffering, particularly within our foreign markets. In fiscal 2004, CVE software and services revenues increased in both the domestic and international markets. The CVE decline was primarily the result ofdeclined $2.7 million, or 57.9%, as compared to fiscal 2003, as the market softeningsoftened for traditional Customer Relationship Management ("CRM")CRM perpetual license sales, and insales. In response, we have reformulated the CVE business modelproduct offering to reflect term software license arrangements as opposed to traditional perpetual license arrangements. This change in strategy appears to be gaininggained acceptance and in November 2004 the CVE group entered into a 6-year term license with a Top 15 U.S. bank that will increase software and maintenance revenue beginningat several large customers in fiscal 2005. Additionally, in early fiscal 2005, we also contracted with a large international bank for a similar multi-year engagement.

        Fiscal 2004 was a year of transition for the Global Payments Technology ("GPT") segment. Several new products were launched such as ExchgLink, Image Inspector and IRD Author. However, we had to shift our image technology strategyWe increased revenues modestly within GPC during the middle of fiscal 2004 because of a change in our market's approach to image exchange and our target customers' timing on implementing these solutions. Additionally in fiscal 2004, we were late to market with our anti-money laundering technology. We just recently introduced the latest components of our CORE (Carreker Online Risk Expert) solution suite. CORE Fraud Manager is a platform that integrates enterprise level risk management for compliance monitoring and fraud detection. The new products are CORE Fraud Manager Wires and CORE Fraud Manager AML. These factors had a negative effect on GPT revenues. For fiscal 2004, total GPT revenues declined $9.7 million, or 11.2%, as compared to fiscal 2003.

        Our Global Payments Consulting ("GPC") segment experienced revenue growth of approximately $680,000, or 16.6%, in fiscal 2004. These results reflect an expanded sales focus in this segment as we repositioned this business to focus on Check 21 enterprise-wide payment electronification strategies; image enablement planning and integration and enterprise risk. New leadership has helped refine our consulting offerings with a clear value proposition.

        Finally, Carretek is our 51% owned business outsourcer for payment and transaction processing. Carretek was formed in fiscal 2003 and signed its first agreement in the second quarter of fiscal 2004. Fiscal 2004 revenues have been minimal, however in late January 2005, we expanded the scope of our outsourcing engagement with this single customer to include a second set of transaction processing functions. Even with this expanded scope, we do not expect this business to be profitable until the scope with this single customer is expanded to its full capacity or until additional customers are added.

        We have continued throughout fiscal 2004 to focus on reducing general and administrative costs to help fund increasing sales and marketing costs in both GPT and GPC, along with increasing research and development costs to enhance our existing product offerings and more importantly, develop new product offerings. We managed to these objectives, however with the increase in our Restructuring and Other Charges, which included the EPG settlement noted above, our total operating costs were essentially flat in fiscal 2004, as compared to fiscal 2003. We are continually evaluating overall expense levels and remain focused on cost containment initiatives.

Results of Operations

Comparison of Year Ended January 31, 2005 (Fiscal 2004) to Year Ended January 31, 2004 (Fiscal 2003) and Year Ended January 31, 2003 (Fiscal 2002)

Revenues

Revenues by Segment ($ in thousands):

        The decline in revenue within our RevE segment in fiscal 2004, as compared to fiscal 2003, was primarily the result of a $2.7 million, or 57.9%, decline in our CVE software and proprietary sales management revenue. In fiscal 2004, the market softened for traditional CRM license sales and in response we have reformulated the CVE business model to reflect term software license arrangements as opposed to traditional perpetual license arrangements. This change in strategy appears to be gaining acceptance as the CVE group signed one large term license engagement late in fiscal 2004 and have signed another similar engagement internationally in earlythrough fiscal 2005. TheThis increase in revenue within the RevE segment in fiscal 2003, as compared to fiscal 2002, was the result of increased demand for our CVE software offering. CVE revenue increased $1.4 million, or 43.5%, in fiscal 2003. This demand was being driven by the trend among our customers to expend investments in branch locations, resulting in pressure to show greater returns on these branch investments through profitable sales growth, which our CVE solution helps generate.

        The declines in revenue within GPT that began in fiscal 2003 also carried over into fiscal 2004. The lack of a strong backlog of contracted sales from fiscal 2003 and reduced contracted sales activity in Q1 and Q3 2004 contributed to the reduced revenue. The decline in sales activity was primarily related to delays in our delivery of new solutions to the market and to unanticipated delays in technology investments by our customers. We also believe some of these delays are due to the fact that we bundle our solutions, which cause a slower sales cycle but typically provides a better value for our customers and the Company. The decline in revenue within the GPT segment in fiscal 2003, as compared to fiscal 2002, was primarily the result of four factors: (i) Fiscal 2002 had a number of transactions for software included inreflects the results for the year that did not involve implementation services and hence revenue was recognized immediately increasing software license revenue in fiscal 2002; (ii) Decisions on technology investments and services projects were delayed out of fiscal 2003 by several of our customers due to the announcement of several mergers involving our customers; (iii) Customer decisions on technology investments were delayed generally out of fiscal 2003 as the industry, our customers, other key constituencies (e.g. Federal Reserve and key processors) and our competitors focused on Check 21 readiness and opportunities; and (iv) The loss of a few opportunities to competitors as these competitors dramatically improved their software offerings and services and offered aggressive pricing proposals.

        The increased revenues within GPC in fiscal 2004, as compared to fiscal 2003, reflects the result of expandedintensified sales focus as we completed the repositioning of this business to focus on Check 21 enterprise-wide payment electronification strategies;strategies, image enablement planning and integration and enterprise risk.risk mitigation. Additionally, new leadership in this business was introduced in Q4late fiscal 2004 to capitalize on

the synergistic nature of the GPC and GPT business segments and refine our solutions with a clear value proposition. The declineAdditionally, with the rise in revenues within our GPC segment in fiscal 2003, as compared to fiscal 2002, was the result of three primary factors. In fiscal 2002, the majority of the consulting work performed by GPC was the result of bank consolidation and staff augmentation assignments. Theinterest rates, there has been renewed demand for both of these types of workour Float Analysis and Management Systems and related services which drove modest increases in license and software implementation revenues in late fiscal 2005. Finally, GPC has declined significantly. Late in fiscal 2002, we began to reposition this segment to address enterprise-wide payment electronification strategiesdeveloped a new Payments Financial Modeling application that has gained acceptance at one major customer and image enablement planning and integration. The timeframe to accomplish these objectives has been longer than anticipated, and carried over into fiscal 2004.licensed to another with revenue expected to be recognized in mid-fiscal 2006.

        Our outsourcing revenue is derived through Carretek, our 51% owned business which offers outsourcing for payment and transaction processing. Carretek was formed in fiscal 2003 and signed its

first agreement in the second quarter of fiscal 2004. The fiscal 2004 revenues have beenwere minimal; however in late Januaryfiscal 2005, we increased staffing under our initial contract and expanded our scope with this single customer to include a second and third set of transaction processing functions.

        Overall, as we look across our three major business segments along with Carretek, we believe that we are well positioned, and have a competitive advantage, to capitalize on the significant changes brought about by the Check 21 legislation, USA Patriot Act and Basel II through our subject matter expertise in the impacted areas. Based on this outlook, we anticipate contracted sales will improve in fiscal 2005 as an expanded array of new products are available and have solid references.

Consulting Fees ($ in thousands):

        Most of our consulting revenues are derived from our RevE business segment. Consulting revenues derived from our RevE segment declined 9.2% to $30.9 million in fiscal 2005, as compared to fiscal 2004, and increased 5.5% to $34.0 million in fiscal 2004 from $32.3 million in fiscal 2003, and increased 1.0% in fiscal 2003 from $31.9 million in fiscal 2002.2003. Within RevE, we continue to focus on maximizing the value to our existing customer base while expanding our expertise to new customers, both domestically and internationally. In fiscal 2004, we had 31 revenue producing engagementsThe fluctuations over the three year period are primarily the result of which 5 were international and these international engagements yielded 28.6% of RevE'sfluctuating contingent consulting revenues. This compares to 22 active engagements of which 3 were international in fiscal 2003 and 28 active engagements of which 7 were international in fiscal 2002. Additionally, RevE consulting revenuerevenues derived from our international customers increased to $9.7 million in fiscal 2004 from $8.1 million in fiscal 2003markets that were negatively influenced by customer mergers and increased from $7.1 million in fiscal 2002. We anticipate thatacquisitions. Domestically, RevE consulting revenues inhave remained relatively flat between $24.0 and $25.0 million for each fiscal 2005 will be higher than fiscal 2004 levels.year.

        Consulting revenues derived from our GPC segment declined 15.7% to $2.3 million in fiscal 2005 and increased 72.6% to $2.8 million in fiscal 2004 from $1.6 million in fiscal 2003, and decreased 76.9%2003. The decline in fiscal 2003 from $6.9 million2005 was primarily attributable to customer scheduling and project prioritization delays on engagements in fiscal 2002.which revenue is recognized on a percent-complete basis. The increase in consulting revenue in fiscal 2004 iswas attributable to the momentum gained as we completed our repositioning of this business to focus on Check 21 enterprise-wide payment strategies and image enablement planning and integration. The decline in consulting revenue in fiscal 2003, as compared to fiscal 2002, was due to the fact that the majority of work performed by GPC in fiscal 2002 and prior years was related to banks consolidating and reducing redundant operations, and to staff augmentation assignments. During fiscal 2002, the demand for this type of work declined significantly and in fiscal 2003 we took the necessary steps to reposition this business as described above. While we have gained some momentum in these areas, we continue to be cautiously optimistic about the future prospects of the GPC segment.

Software License Fees ($ in thousands):

        The majorityMost of our software license revenues are derived from our GPT business segment. Software license revenues from our GPT business segment decreased 15.3% to $17.0 million in fiscal 2005 and decreased 18.6% to $20.1 million in fiscal 2004 from $24.7 million in fiscal 2003 and decreased 31.7% in fiscal 2003 from $36.1 million in fiscal 2002.2003.

        License revenues peaked during the first two quarters of fiscal 2002 due to sales of $7.5 million of software expansion licenses which did not require any implementation services and therefore were recognized immediately. In the latter half of fiscal 2002, the number and dollar amount of our software license arrangements began to decline. The decline was in part due to the uncertainty of our special review and ultimate financial statement restatement; however, ourOur customers also began to delay their Payment solution purchasing decisions primarily due to both economic and legislative changes within the banking industry, namely Check 21, which was ultimately signed into law in October 2003 and went into effect in October 2004. Check 21 permits U.S. banks to accept digital images of checks the same way they accept a paper check. SeveralWe have introduced several new product initiatives were launchedPayment solution products to compete in the latter half of fiscal 2003 and continued into fiscal 2004. While these products can operate independently and eventhis space such as ExchgLink, our solution for exchanging images with other vendor software, these products were developedbanks, IRD Author which generates and processes substitute checks often referred to be bundled togetheras image replacement documents ("IRD"), Image Inspector which ensures image quality and finally, Source Capture which allows customers to provide one total solution to our customers which we believe provides increased value. This bundling also tends to delaycapture deposits at branches, ATM's and bank customer sites. The decline in paper checks over the sales cycle. We believe that our customers' investment decisionspast three years has been moderate and the timing of these decisionsmost banks have become increasingly visible in the latter half of fiscal 2004. Combining these factors, we are cautiously optimistic about deriving license revenue growth for fiscal 2005, as compared to fiscal 2004 levels.not fully implemented image exchange.

        Software license revenues from our CVE product line,offering, within the RevE business segment, increased 218.2% to $1.0 million in fiscal 2005 and decreased 87.5% to $326,000 in fiscal 2004 from $2.6 million in fiscal 2003 and increased 171.9% in fiscal 2003 from $959,000 in fiscal 2002.2003. The decline in fiscal 2004 and the increase over fiscal 2002 was primarily the result of two large international

engagements performedcompleted in fiscal 2003. Also in fiscal 2003 and carrying over until fiscal 2004, this group lacked sales leadership and capacity. Two new sales persons were hired in the quarterly period ended October 31, 2004, and in November 2004market softened for traditional CRM perpetual license sales. In response, we reformulated the CVE groupbusiness model to reflect term software license arrangements as opposed to traditional, one-time perpetual license arrangements. This change in strategy gained acceptance and two multi-year contracts were signed a multi-year contractin fiscal 2005 to provide software, services and maintenance to a large domestic bank. However, the impact on fiscal 2004 was negligible.maintenance.

Software Maintenance Fees ($ in thousands):

        As with software license fees, the majoritymost of our maintenance fees are derived from our GPT business segment. Software maintenance fees are paid pursuant to annually renewable product and telephone support agreements with our software customers. The annual maintenance fee is generally paid by the customer at the beginning of the maintenance period and we recognize this maintenance revenue ratably over the term of the related contract. If the annual maintenance fee is not paid at the beginning of the maintenance period, we defer revenue recognition until the time that the maintenance fee is paid by the customer. When the payment is received, maintenance revenue is recognized for the period that maintenance revenue was previously deferred. Also, maintenance contracts usually carry annual maintenance fee escalation clauses typically based on an index, such as the consumer price

index. While we did increase the maintenance fees for selected customers and products in each of the last two fiscal 2004,years, these increases were offset by maintenance cancellations caused by major bank mergers and also multi-year declines in new software license revenue described above. Finally, during the quarter ended January 31, 2006, three large maintenance customers did not pay $6.5 million of maintenance by January 31, 2006 which had a major customer that gave noticenegative effect of their intent to not renew their $2.5 million maintenance contract forapproximately $540,000 on the quarter and fiscal 2004. The increase in maintenance fees in fiscal 2003 is due primarily to the expanded product installation base of the products acquired in the Check Solutions acquisition in fiscal 2001. We are projecting a flat to slightly higher maintenance revenue in fiscal 2005 over fiscal 2004 maintenance revenue levels.year.

Software Implementation Feesand Other Services ($ in thousands):

        In the majority of our software customer arrangements, installation services are provided to the customer. The majority of our software implementation fees are derived from our GPT business segment. InHowever, the majority24.7% increase in software implementation and other services in fiscal 2005, as compared to fiscal 2004, was primarily the result of a $2.7 million or 403.5% increase in service revenue related to our customer arrangements, installationCVE product offering within the RevE business segment. GPT services are provided to the customer.increased $595,000 or 4.4% and GPC services increased $348,000 or 46.3%. In fiscal 2004, andas compared to fiscal 2003, the decline in software implementation fees paralleledreflect the decline in software license fees. We estimate modest growth in fiscal 2005 for software implementation revenue consistent with our anticipated modest increase in software license revenue.fees within GPT.

Outsourcing Service FeesServices ($ in thousands):

        Our outsourcing service revenue is derived through Carretek, our 51% owned business which outsources payment and transaction processing. Carretek was formed in fiscal 2003 and signed its first agreement in the second quarter of fiscal 2004. The fiscal 2004 revenues have beenwere minimal; however in late Januaryfiscal 2005, we expanded our scope of business with this customer to include a second and third set of transaction processing functions. GivenWhile we continue to pursue opportunities to expand the scope of the services we provide to our current outlook,existing customer, we believe that the revenues derived from this business will increase significantly on a percentage basis over fiscal 2004 levels and increase modestlydo not expect significant growth on an absolute dollar basis.basis until additional outsourcing customers are obtained.

Out-of-Pocket Expense Reimbursements ($ in thousands):

        These reimbursements were relatively flat on a consolidated basis in fiscal 2005, as compared to fiscal 2004. The decrease in these reimbursements in fiscal 2004, as compared to fiscal 2003, is the result of the decline in implementation engagements within the GPT business segment. The decrease in these reimbursements in fiscal 2003, as compared to fiscal 2002, is primarily due to the decline in the volume within our GPC business segment. The majority of these GPC engagements in fiscal 2002 was related to staff augmentation assignments which required our employees to be at the customer location for extended periods of time, which gives rise to higher out-of-pocket expense reimbursements. In fiscal 2005, we expect these reimbursements to increase modestly with our anticipated increases in both software implementation and consulting revenues.

Cost of Revenues

Cost of Revenues by Segment ($ in thousands):

        The decrease in total cost of revenues of $2.5 million in fiscal 2005, as compared to fiscal 2004, was primarily the result of lower personnel and personnel related costs within both GPT and GPC business segments, partially offset by increased personnel and third party contractor costs to service our several large CVE contracts within the RevE segment and increased costs to service our outsourcing customer. The decreased costs within GPT are primarily the result of expense reduction initiatives which began in late fiscal 2004 and continued in the quarter ended October 31, 2005 when GPT further reduced its workforce by 29 employees to further reduce costs and improve utilization. The decrease in total cost of revenues in absolute dollars of $4.0 million in fiscal 2004, as compared to fiscal 2003, was primarily the result of lower personnel and personnel related costs within all three of our majorRevE, GPT and GPC business segments. These savings were partially offset by the costs of Carretek, our 51% owned business process outsourcer which only has one customer and has not achieved the anticipated economies of scale. The total cost of revenues was 50.6% of total revenue in fiscal 2004. In fiscal 2005, we expect cost of revenues in absolute dollars to increase slightly; however, the total cost of revenues as a percentage of total revenues is expected to decline.outsourcer.

        The decrease in total cost of revenues in absolute dollars of $7.1 million in fiscal 2003, as compared to fiscal 2002, was primarily the result of lower personnel and outside independent contractor and consulting costs within the GPC business segment.

Cost of Consulting ($ in thousands):