United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

ýQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Period Ended ~~October 31, 2004.~~April 30, 2005.

oTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition

Period from to .

Commission file number 0-24201

Carreker Corporation

(Exact name of registrant as specified in its charter)

Delaware		75-1622836
(State or other jurisdiction of ~~incorporation or organization)~~		(IRS Employer Identification No.)
incorporation or organization)

4055 Valley View Lane, #1000
Dallas, Texas		75244
(Address of principal executive office)		(Zip Code)

~~(972) 458-1981~~

~~(Registrant’s telephone number, including area code)~~

(972) 458-1981

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 periods 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common Stock, $.01 par value ~~— 24,860,198~~--- 24,539,636 shares as of ~~November 30, 2004.~~

May 31, 2005.

CARREKER CORPORATION

Index

PART 1:		FINANCIAL INFORMATION

~~Item 1.~~	~~Financial Statements (unaudited)~~

Item 1.		~~Condensed Consolidated Balance Sheets at October 31, 2004 and January 31, 2004~~Financial Statements (unaudited)

		Condensed Consolidated ~~Statements of Operations for the three~~Balance Sheets at April 30, 2005 and ~~nine months ended October~~January 31, ~~2004 and 2003~~2005

		Condensed Consolidated Statements of ~~Stockholders’ Equity~~Operations for the three ~~and nine~~ months ended ~~October 31,~~April 30, 2005 and 2004

		Condensed Consolidated Statements of ~~Cash Flows~~Stockholders’ Equity for the three ~~and nine~~ months ended ~~October 31, 2004 and 2003~~April 30, 2005

		Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 2005 and 2004

		Notes to Condensed Consolidated Unaudited Financial Statements

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.		Quantitative and Qualitative Disclosures about Market Risk

Item 4.		Controls and Procedures

PART II:		OTHER INFORMATION

Item 1.		Legal Proceedings

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.		Defaults Upon Senior Securities

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

Item 5.		Other Information

Item 6.		Exhibits

SIGNATURES

PART I:I: FINANCIAL INFORMATION

Item 1.1. Financial Statements

CARREKER CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share amounts)
~~ASSETS~~

	October 31,			January 31,			April 30,			January 31,
	2004			2004			2005			2005

ASSETS
Current assets
Cash and cash equivalents	$	26,787		$	28,605		$	35,745		$	34,516
Accounts receivable, net of allowance of $667 and $1,512 at October 31, 2004 and January 31, 2004, respectively	11,950			21,751
Accounts receivable, net of allowance of $504 and $529 at April 30, 2005 and January 31, 2005, respectively							10,736			11,144
Prepaid expenses and other current assets	2,913			3,331			3,216			2,595
Total current assets	41,650			53,687			49,697			48,255

Property and equipment, net of accumulated depreciation of $19,480 and $17,140 at October 31, 2004 and January 31, 2004, respectively	6,918			6,690
Capitalized software costs, net of accumulated amortization of $12,197 and $11,050 at October 31, 2004 and January 31, 2004, respectively	3,083			2,028
Acquired developed technology, net of accumulated amortization of $14,618 and $11,153 at October 31, 2004 and January 31, 2004, respectively	11,082			14,547
Goodwill, net of accumulated amortization of $3,405 at October 31, 2004 and January 31, 2004	20,765			21,193
Customer relationships, net of accumulated amortization of $4,783 and $3,733 at October 31, 2004 and January 31, 2004, respectively	3,617			4,667
Deferred loan costs, net of accumulated amortization of $1,232 and $1,028 at October 31, 2004 and January 31, 2004, respectively	476			680
Property and equipment, net of accumulated depreciation of $20,785 and $20,194 at April 30, 2005 and January 31, 2005, respectively							6,509			6,604
Capitalized software costs, net of accumulated amortization of $12,692 and $12,426 at April 30, 2005 and January 31, 2005, respectively							3,416			3,245
Acquired developed technology, net of accumulated amortization of $16,928 and $15,773 at April 30, 2005 and January 31, 2005, respectively							8,772			9,927
Goodwill, net of accumulated amortization of $3,405 at April 30, 2005 and January 31, 2005							20,765			20,765
Customer relationships, net of accumulated amortization of $5,483 and $5,133 at April 30, 2005 and January 31, 2005, respectively							2,917			3,267
Deferred loan costs, net of accumulated amortization of $1,368 and $1,300 at April 30, 2005 and January 31, 2005, respectively							340			407
Other assets	1,036			1,087			829			835
Total assets	$	88,627		$	104,579		$	93,245		$	93,305

Current liabilities
Accounts payable	$	1,151		$	913		$	874		$	992
Accrued compensation and benefits	7,159			9,219			5,953			7,818
Other accrued expenses	3,274			4,520			3,639			3,609
Income tax payable	222			181			350			339
Deferred revenue	17,566			25,231			23,981			22,181
Accrued merger and restructuring costs	594			1,898			561			1,004
Total current liabilities	29,966			41,962			35,358			35,943
Long-term debt	—			6,250
Other long-term liabilities	481			49			196			—
Total liabilities	30,447			48,261			35,554			35,943

Commitments and Contingencies

Stockholders’ equity
Preferred stock, $.01 par value: 2,000 shares authorized; no shares issued or outstanding	—			—
Common stock, $.01 par value: 100,000 shares authorized; 24,848 and 24,357 shares issued at October 31, 2004 and January 31, 2004, respectively	249			244
Preferred stock, $.01 par value:
2,000 shares authorized; no shares issued or outstanding							—			—
Common stock, $.01 par value:
100,000 shares authorized; 24,857 and 24,852 shares issued at April 30, 2005 and January 31, 2005, respectively							249			249
Additional paid-in capital	110,714			108,757			111,172			110,992
Accumulated deficit	(52,780		)	(52,680		)	(53,378		)	(53,876		)
Less treasury stock, at cost: 1 common share at October 31, 2004 and January 31, 2004	(3		)	(3		)
Less treasury stock, at cost							(352		)	(3		)
Total stockholders’ equity	58,180			56,318			57,691			57,362
Total liabilities and stockholders’ equity	$	88,627		$	104,579		$	93,245		$	93,305

See accompanying notes.

CARREKER CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended October 31,						Nine Months Ended October 31,						Three Months Ended April 30,
	2004			2003			2004			2003			2005			2004

Revenues:
Consulting fees	$	7,930		$	6,396		$	27,501		$	21,349		$	8,318		$	9,057
Software license fees	5,701			7,026			16,134			21,955			3,359			5,856
Software maintenance fees	11,491			11,770			32,807			34,764			11,312			11,084
Software implementation fees	4,622			4,983			11,143			14,385			4,134			2,879
Outsourcing service fees	50			—			60			—			257			—
Out-of-pocket expense reimbursements	813			1,228			2,365			3,367			818			890
Total revenues	30,607			31,403			90,010			95,820			28,198			29,766

Cost of revenues:
Consulting fees	4,555			4,936			14,166			15,193			4,241			4,529
Software license fees	2,503			2,037			5,771			5,662			1,536			1,598
Software maintenance fees	3,765			3,600			10,949			9,910			3,975			3,798
Software implementation fees	4,002			4,485			11,181			14,398			2,973			3,369
Outsourcing service fees	222			—			236			—			579			—
Out-of-pocket expenses	738			1,122			2,333			3,413			790			943
Total cost of revenues	15,785			16,180			44,636			48,576			14,094			14,237
Gross profit	14,822			15,223			45,374			47,244			14,104			15,529

Operating costs and expenses:
Selling, general and administrative	11,320			11,797			35,483			36,267			10,904			12,192
Research and development	2,520			1,876			6,102			5,522			2,521			1,708
Amortization of customer relationships	350			350			1,050			1,050			350			350
Restructuring and other charges	266			(229		)	2,978			1,233			95			2,515
Total operating costs and expenses	14,456			13,794			45,613			44,072			13,870			16,765
Income (loss) from operations	366			1,429			(239		)	3,172			234			(1,236		)

Other income (expense):
Interest income	92			69			207			223			144			48
Interest expense	(106		)	(234		)	(336		)	(991		)	(105		)	(108		)
Other income	275			219			732			269			306			484
Total other income (expense)	261			54			603			(499		)
Income before provision for income taxes	627			1,483			364			2,673
Total other income (expense), net													345			424
Income (loss) before provision for income taxes													579			(812		)
Provision for income taxes	114			146			464			372			81			—
Net income (loss)	$	513		$	1,337		$	(100	)	$	2,301		$	498		$	(812	)
Basic earnings (loss) per share	$	0.02		$	0.06		$	0.00		$	0.10		$	0.02		$	(0.03	)
Diluted earnings (loss) per share	$	0.02		$	0.05		$	0.00		$	0.10		$	0.02		$	(0.03	)
Shares used in computing basic earnings (loss) per share	24,821			23,812			24,623			23,635			24,425			24,376
Shares used in computing diluted earnings (loss) per share	25,589			24,645			24,623			23,820			24,867			24,376

See accompanying notes.

CARREKER CORPORATION

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except per share amounts)

	Common Stock				Additional Paid-In		Accumulated			Treasury Stock				Total Stockholders’			Common Stock				Additional Paid-In			Accumulated			Treasury Stock				Total Stockholders’
	Shares		Amount		Capital		Deficit			Shares	Amount			Equity			Shares		Amount		Capital			Deficit			Shares	Amount			Equity
Balance at January 31, 2004	24,357		$	244	$	108,757	$	(52,680	)	1	$	(3	)	$	56,318
Balance at January 31, 2005																	24,852		$	249	$	110,992		$	(53,876	)	1	$	(3	)	$	57,362

Cancellation of restricted stock	(20	)	—		—		—			—	—			—			(5	)	—		(12		)	—			—	—			(12		)
Compensation expense related to issuance of restricted stock	—		—		35		—			—	—			35			—		—		140			—			—	—			140
Issuance of shares of common stock upon exercise of stock options	74		—		375		—			—	—			375
Net loss	—		—		—		(812		)	—	—			(812		)
Balance at April 30, 2004	24,411		244		109,167		(53,492		)	1	(3		)	55,916

Cancellation of restricted stock	(7	)	—		—		—			—	—			—
Compensation expense related to issuance of restricted stock	251		2		139		—			—	—			141
Issuance of shares of common stock upon exercise of stock options	147		2		947		—			—	—			949
Issuance of shares of common stock upon exercises of stock options																	10		—		52			—			—	—			52
Common stock repurchases																	—		—		—			—			70	(349		)	(349		)
Net income	—		—		—		199			—	—			199			—		—		—			498			—	—			498
Balance at July 31, 2004	24,802		248		110,253		(53,293		)	1	(3		)	57,205

Cancellation of restricted stock	(4	)	—		—		—			—	—			—
Compensation expense related to issuance of restricted stock	2		—		148		—			—	—			148
Issuance of shares of common stock upon exercise of stock options	48		1		313		—			—	—			314
Net income	—		—		—		513			—	—			513
Balance at October 31, 2004	24,848		$	249	$	110,714	$	(52,780	)	1	$	(3	)	$	58,180
Balance at April 30, 2005																	24,857		$	249	$	111,172		$	(53,378	)	71	$	(352	)	$	57,691

See accompanying notes.

CARREKER CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Three Months Ended October 31,						Nine Months Ended October 31,						Three Months Ended April 30,
	2004			2003			2004			2003			2005			2004
Operating Activities:
Net income (loss)	$	513		$	1,337		$	(100	)	$	2,301		$	498		$	(812	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization of property and equipment	826			882			2,483			2,588			793			822
Amortization of capitalized software costs and acquired developed technology	1,823			1,311			4,611			3,917			1,421			1,394
Amortization of customer relationships	350			350			1,050			1,050			350			350
Compensation expense related to issuance of restricted stock	148			52			324			87
Amortization of deferred loan costs													68			68
Compensation earned under restricted stock plan													128			35
Minority share of loss in Carretek LLC	(234		)	—			(454		)	—			(318		)	(86		)
Non-cash charge for merger costs													(32		)	—
EPG Litigation settlement													—			1,686
Allowance for doubtful accounts													7			(180		)
Gain on sale of Cash Services Australia Pty. Limited	—			—			(539		)	—			—			(539		)
Reduction in allowance for doubtful accounts	(275		)	(91		)	(667		)	(118		)
Amortization of deferred loan costs	67			68			204			284
Non cash reduction in merger cost accrual	—			(540		)	(1,215		)	(540		)
Changes in operating assets and liabilities:
Accounts receivable	3,571			(2,332		)	10,468			3,389			401			6,773
Prepaid expenses and other current assets	525			(1,574		)	1,462			(710		)
Prepaid expenses and other assets													(324		)	301
Accounts payable and accrued expenses	(451		)	164			(2,729		)	(2,918		)	(2,692		)	(3,273		)
Income taxes payable/receivable	87			11			41			111			10			(33		)
Deferred revenue	(7,159		)	(4,437		)	(7,665		)	(240		)	1,800			3,244
Net cash provided by (used in) operating activities	(209		)	(4,799		)	7,274			9,201
Net cash provided by operating activities													2,110			9,750

Investing Activities:
Purchases of property and equipment	(1,346		)	(279		)	(2,711		)	(849		)	(698		)	(231		)
Computer software costs capitalized	(593		)	(204		)	(2,201		)	(204		)	(437		)	(910		)
Purchase of acquired developed software	—			(1,500		)	—			(1,500		)
Net cash used in investing activities	(1,939		)	(1,983		)	(4,912		)	(2,553		)	(1,135		)	(1,141		)

Financing Activities:
Payments on long-term debt	—			—			(6,250		)	(12,500		)	—			(6,250		)
Payments of deferred loan costs	—			—			—			(456		)
Proceeds from exercises of stock options	314			384			1,638			384			52			375
Minority interest and minority shareholder loan to Carretek LLC	172			98			432			98
Purchase of treasury stock													(349		)	—
Proceeds of minority shareholder cash advances to Carretek LLC													551			147
Net cash provided by (used in) financing activities	486			482			(4,180		)	(12,474		)	254			(5,728		)
Net decrease in cash and cash equivalents	(1,662		)	(6,300		)	(1,818		)	(5,826		)
Net increase in cash and cash equivalents													1,229			2,881
Cash and cash equivalents at beginning of period	28,449			27,460			28,605			26,986			34,516			28,605
Cash and cash equivalents at end of period	$	26,787		$	21,160		$	26,787		$	21,160		$	35,745		$	31,486

Supplemental disclosures of cash flow information:
Cash paid for interest	$	38		$	79		$	147		$	748		$	38		$	71
Cash paid for income taxes, net	$	11		$	118		$	393		$	248		$	76		$	33

See accompanying notes.

Carreker Corporation

Notes to Condensed Consolidated Unaudited Financial Statements
For the Three ~~and Nine~~ Months Ended ~~October 31,~~April 30, 2005 and 2004 ~~and 2003~~

1. Description of Business

Carreker Corporation (“the Company,” “Carreker,” “our,” “we”) provides payments-related software, consulting and ~~consulting~~business process outsourcing solutions to financial institutions and financial service providers. These solutions help the Company’s customers set winning strategies in their payment businesses; improve operational efficiency in how payments are processed; enhance revenue and profitability from payments-oriented products and services; reduce losses associated with fraudulent payment transactions; and/or improve the alignment of product offerings with customer needs.

2. Summary of Significant Accounting Procedures

Principles of Consolidation and Presentation

The condensed consolidated unaudited financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

~~In the three and nine months ended October 31, 2004, the~~The consolidated financial statements also ~~contain~~reflect the operations of Carretek LLC, which is a 51% owned subsidiary. The minority interest and minority interest in income (loss) of Carretek LLC ~~represents~~represent the 49% minority ~~stockholders’~~stockholder’s investment and share of the loss of this consolidated subsidiary.

The accompanying condensed consolidated unaudited financial statements and notes have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q and include all of the information and disclosures required by generally accepted accounting principles for interim financial reporting. The accompanying financial statements reflect all adjustments (consisting of normal recurring entries) which in the opinion of management are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three ~~and nine~~ months ended ~~October 31, 2004,~~April 30, 2005 are not necessarily indicative of full-year results.

Certain prior year amounts have been reclassified to conform to the current year presentation. For the three months ended October 31, 2003, selling, general and administrative expenses have been reduced by $356,000, while cost of sales-software maintenance fees, cost of sales-software implementation fees and research and development expenses increased $142,000, $72,000 and $142,000, respectively. Additionally, for the nine months ended October 31, 2003, selling, general and administrative expenses have been reduced by $666,000, while cost of sales-software maintenance fees, cost of sales-software implementation fees and research and development expenses increased $266,000, $134,000 and $266,000, respectively. These reclassifications were made to conform to the presentation of certain information technology costs in the three and nine months ended October 31, 2004.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. As discussed below, the Company makes significant estimates and assumptions in the areas of accounts receivable, impairment of intangibles and revenue recognition. Although the Company believes that the estimates and assumptions are reasonable, actual results may differ, and such differences could be significant to the Company’s financial results.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist primarily of demand deposit accounts and shares in a demand money market account comprised of domestic and foreign commercial paper, certificates of deposit and U.S. government obligations which are maintained with nationally recognized financial institutions.

Foreign Currency Translation

The Company considers the U.S. Dollar to be the functional currency for its international subsidiaries. All remeasurement adjustments are recorded in the consolidated ~~statement~~statements of operations.

Accounts Receivable and Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentration of credit risk consist principally of temporary cash investments and accounts receivable. The Company places temporary cash investments with major banks and limits its exposure with any one financial institution.

A significant portion of the Company’s business consists of providing consulting services and licensing software to major domestic and international banks, which gives rise to a concentration of credit risk in receivables. Because the Company’s accounts receivable are typically unsecured, the Company periodically evaluates the collectibility of its accounts based on a combination of factors, including a particular customer’s ability to pay as well as the age of receivables. In cases where the evidence suggests a customer may not be able to satisfy its obligation to the Company or if the collection of the receivable becomes doubtful due to a dispute that arises subsequent to the delivery of the Company’s products and services, the Company sets up a reserve in an amount determined appropriate for the perceived risk. Most of the Company’s contracts include multiple payment milestones, some of which occur in advance of revenue recognition, which mitigates the risk both in terms of collectibility and adjustments to recorded revenue. Write-offs of receivables during the three months ended ~~October 31,~~April 30, 2005 and 2004 were $32,000 and ~~2003 were $45,000 and $76,000, respectively. Write-offs of receivables during the nine months ended October 31, 2004 and 2003 were $179,000 and $181,000,~~$0, respectively.

The fair value of accounts receivable approximates the carrying amount of accounts receivable.

Accounts receivable, net of related deferred revenue and allowances, consist of the following (in thousands):

							April 30,			January 31,
	October 31,			January 31,			2005			2005
	2004			2004
Gross accounts receivable	$	38,207		$	65,109		$	32,504		$	47,000
Less related deferred revenue	(25,590		)	(41,846		)	(21,264		)	(35,327		)
Less allowance for doubtful accounts	(667		)	(1,512		)	(504		)	(529		)
Net accounts receivable	$	11,950		$	21,751		$	10,736		$	11,144

Property and Equipment

Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally from ~~three~~two to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the terms of the related leases or the respective useful lives of the assets. The components of property and equipment are as follows (in thousands):

							April 30,			January 31,
	October 31,			January 31,			2005			2005
	2004			2004
Furniture	$	5,098		$	5,070		$	5,071		$	5,069
Equipment and software	20,032			17,686			20,939			20,446
Leasehold improvements	1,268			1,074			1,284			1,283
Total cost	26,398			23,830			27,294			26,798

Less accumulated depreciation and amortization	(19,480		)	(17,140		)	(20,785		)	(20,194		)
Net property and equipment	$	6,918		$	6,690		$	6,509		$	6,604

The Company accounts for the costs of computer software developed or obtained for internal use in accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”. The Company capitalizes costs of consultants, and payroll and payroll-related costs for employees incurred in developing internal-use computer software. These costs are included in “Equipment and Software”. Costs incurred during preliminary project and post-implementation stages are charged to expense.

Long Lived Assets

The Company accounts for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” ~~(SFAS 142)~~(“SFAS 142”). Under the provisions of SFAS 142, an annual assessment of goodwill impairment is performed. This assessment involves the use of estimates related to fair market values of the Company’s reporting units with which the goodwill is associated. The assessment of goodwill impairment in the future will be impacted if future operating cash flows of the Company’s reporting units decline significantly, which ~~would~~could result in decreases in the related estimate of fair market value. The Company performs its annual impairment analysis as of November 1^st of each year and whenever facts and circumstances indicate impairment may exist. Intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that an asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.

The Company accounts for long lived assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” ~~(SFAS 144)~~(“SFAS 144”). Under the provisions of SFAS 144, long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization, are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the assets exceeds the fair value of the asset.

Deferred Loan Costs

Deferred loan costs consist of loan closing costs and other administrative expenses associated with the Revolving Credit Agreement. On July 31, 2003, the Revolving Credit Agreement was amended as described in Note 4. In connection with this amendment, the Company incurred approximately $456,000 of deferred loan costs. These costs, along with the net book value of the original deferred loan costs, are being amortized to interest expense over the 36 month life of the Revolving Credit Agreement.

Capitalized Software Costs and Acquired Developed Technology

The Company capitalizes 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 to be Sold, Leased or Otherwise Marketed” (“SFAS 86”). The Company’s policy is to capitalize software development costs incurred in developing a product once technological feasibility of the product has been established. Technological feasibility of the product is determined after completion of a detailed program design and a determination has been made that any uncertainties related to high-risk development issues have been resolved. If the process of developing the product does not include a detail program design, technological feasibility is determined only after completion of a working model. All software development costs capitalized are amortized using an amount determined as the greater of: (1) the ratio that current gross revenues for a capitalized software project ~~bear~~bears to the total of current and estimated future gross revenues for that project or (2) the straight-line method over the estimated remaining economic life of the product (generally three to ~~six~~five years). The Company capitalized ~~$593,000~~$437,000 and ~~$204,000 of software development costs~~$910,000 in the three months ended ~~October 31,~~April 30, 2005 and 2004, ~~and 2003, respectively. The Company capitalized $2.2 million and $204,000 of software development costs in the nine months ended October 31, 2004 and 2003,~~ respectively. The Company developed software for sending and receiving check images, and is currently developing software for distributed capture of checks and check images and extending the functionality of ~~the~~its anti-money laundering software ~~discussed below. The products reached technological feasibility in~~and other Risk solutions. In the ~~latter half~~three months ended April 30, 2005, the Company also began development of ~~fiscal 2003~~a product to verify cash logistic invoices with automated precision and ~~accordingly certain costs subsequently incurred were capitalized under SFAS 86.~~an internet-based track and trace system that streamlines the cash delivery management process.

The Company recorded amortization relating to software development costs capitalized of ~~$668,000~~$266,000 and $239,000 in the three months ended ~~October 31,~~April 30, 2005 and 2004, ~~and 2003,~~ respectively. The Company recorded amortization relating to software development costs capitalized of $1.1 million and $786,000 in the nine months ended October 31, 2004 and 2003, respectively. The increase in the amortization is the result of approximately $380,000 of amortization related to the ExchgLink product which was made generally available in the three months ended October 31, 2004. Amortization expense is recorded as a component of cost of software license fees in the accompanying consolidated statements of operations.

In October 2003, the Company purchased an anti-money laundering software solution designed to help banks protect both their customers and their corporate reputations from the growing risk of financial fraud and to comply with a growing number of laws and regulations. The $1.5 million purchase price was recorded in acquired developed technology in the accompanying condensed consolidated balance sheets and is being amortized over a 3-year period.

Acquired developed technology includes purchased technology intangible assets associated with acquisitions. These purchased technology intangibles are initially recorded based on the fair value ascribed at the time of acquisition.

Acquired developed technology with a useful life of 3-6 years is amortized on a straight-line basis, resulting in amortization expense of $1.2 million ~~and $1.1 million~~ for the three months ended ~~October 31,~~April 30, 2005 and 2004, ~~and 2003, respectively, and $3.5 million and $3.1 million for the nine months ended October 31, 2004 and 2003.~~respectively. Amortization expense is recorded as a component of cost of software license fees in the accompanying consolidated statements of operations.

The following table sets forth the estimated amortization expense of capitalized software costs and acquired developed technology for the ~~three months remaining in fiscal year ending January 31, 2005 and for the remaining future~~indicated fiscal years ending January 31 (in thousands):

Period

Capitalized
Software Costs

Acquired
Developed
Technology

November 1, 2004 – January 31, 2005

$
198

$
1,155

Fiscal year ending January 31, 2006

464

4,620

Fiscal year ending January 31, 2007

355

4,107

Fiscal year ending January 31, 2008

236

1,200

Year	Capitalized Software Costs		Acquired Developed Technology
2006	$	429	$	3,465
2007	573		4,107
2008	410		1,200

The table does not include the estimated amortization expense for ~~$1.8~~$2.0 million of capitalized software products that are currently being developed, and for which amortization has not commenced.

The Company continually monitors the net realizable value of software capitalized and acquired developed technology for factors that would indicate impairment such as a decline in demand or a loss of a significant customer. During the quarterly period ended January 31, 2005, the Company performed its annual formal evaluation for impairment and determined that the carrying amount of these assets was not impaired and has subsequently noted no factors that would indicate impairment.

Revenue Recognition

The Company’s revenue recognition policies are in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions,” Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” and Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables.” In the case of software arrangements that require significant production, modification, or customization of software, or the license agreement requires the Company to provide implementation services that are determined to be essential to other elements of the arrangement, the Company follows the guidance in SOP 81-1, “Accounting for Performance of ~~Construction —~~ Construction–Type and Certain ~~Production —~~ Production–Type Contracts.”

Consulting Fees. The Company employs three primary pricing methods in connection with its delivery of consulting services. First, the Company may price its delivery of consulting services on the basis of time and materials, in which case the customer is charged agreed-upon daily rates for services performed and out-of-pocket expenses. In this case, the Company is generally paid fees and related amounts usually on a monthly basis, and the Company recognizes revenues as the services are performed. Second, the Company may deliver consulting services on a fixed-price basis. In this case, the Company is paid on a monthly basis or pursuant to an agreed upon payment schedule, and the Company recognizes revenues on a ~~percentage-of-completion~~proportionate performance basis. The Company believes that this method is appropriate because of its ability to determine performance milestones and determine dependable estimates of its costs applicable to each phase of a contract. Because financial reporting of these contracts depends on estimates, which are assessed continually during the term of the contract, costs are subject to revisions as the contract progresses. Anticipated losses on fixed-price contracts are recognized when estimatable. Third, the Company may deliver consulting services pursuant to a value-priced contract with the customer. In this case, the Company is paid, on an agreed upon basis with the customer, either a specified percentage of (1) the projected increased revenues and/or decreased costs that are expected to be derived by the customer generally over a period of up to twelve months following implementation of its solution or (2) the actual increased revenues and/or decreased costs experienced by the customer generally over a period of up to twelve months following implementation of its solution, subject in either case to a maximum, if any is agreed to, on the total amount of payments to be made to the Company. The Company must first commit time and resources to develop projections associated with value-pricing contracts before a customer will commit to purchase its solutions, and the Company therefore assumes the risk of making these commitments with no assurance that the customer will purchase the solution. Costs associated with these value-pricing contracts are expensed as incurred. These contracts typically include payments to be made to the Company pursuant to an agreed upon schedule ranging from one to twelve months in length. The Company recognizes revenues generated from consulting services in connection with value-priced contracts based upon projected results only upon completion of all services and agreement upon the actual fee to be paid (even though billings for these services may be delayed by mutual agreement for periods not to exceed twelve months). In an effort to allow

customers to more closely match expected benefits from services with payments to the Company,, the Company on occasion, may offer payment terms which extend beyond 12 months. When the Company enters into an agreement which has a significant component of the total amount payable under the agreement due beyond 12 months or if it is determined payments are not fixed and determinable at the date the agreement was entered into, revenue under the arrangement will be recognized as payments become due and payable. When fees are to be paid based on a percentage of actual revenues and/or savings to customers, the Company recognizes revenues only upon completion of all services and as the amounts of actual revenues or savings are confirmed by the customer with a fixed payment date.

Costs associated with time and materials, fixed-priced and value-priced consulting fee arrangements are expensed as incurred and are included as a component of the cost of consulting fees.

The Company expects that value-pricing contracts will continue to account for a significant portion of its revenues in the future. As a consequence of the use of value-pricing contracts and due to the revenue recognition policy associated with those contracts, the Company’s results of operations will likely fluctuate significantly from period to period.

Regardless of the pricing method employed by the Company in a given contract, the Company is typically reimbursed on a monthly basis for out-of-pocket expenses incurred on behalf of its customers.

Software License Fees. A software license is sold either together with implementation services or on a stand-alone basis. The Company is usually paid software license fees in one or more installments, as provided in the customer’s contract but not to exceed twelve months. The Company recognizes software license revenue upon execution of a contract and delivery of the software, provided that the license fee is fixed and determinable, no significant production, modification or customization of the software is required and collection is considered probable by management. When the software license arrangement requires the Company to provide implementation services that are essential to the functionality of the software or significant production, customization or modification of the software is required, both the product license revenue and implementation fees are recognized as services are performed.

In certain instances, especially with recently developed software, the Company defers software license revenue recognition until the earlier of the product being determined to be generally available and subject to revenue recognition or when the services are completed and the project is accepted by the customer. This practice is followed for the first two installations of a recently developed software product. After two successful implementations, the product is considered generally available (“GA”).

Software licenses are often sold as part of a multiple element arrangement that may include maintenance, implementation or consulting. The Company determines whether there is vendor specific objective evidence of fair value (“VSOEFV”) for each element identified in the arrangement to determine whether the total arrangement fees can be allocated to each element. If VSOEFV exists for each element, the total arrangement fee is allocated based on the relative fair value of each element. In cases where there is not VSOEFV for each element, or if it is determined services are essential to the functionality of the software being delivered, or if significant production, modification or customization of the software is required, the Company initially defers revenue recognition of the software license fees until VSOEFV is established or the services are performed. However, if VSOEFV is determinable for all of the undelivered elements, and assuming the undelivered elements are not essential to the delivered elements, the Company will defer recognition of the full fair value related to the undelivered elements and recognize the remaining portion of the arrangement value through application of the residual method. Where VSOEFV has not been established for certain undelivered elements, revenue for all elements is deferred until those elements have been delivered or their fair values have been determined. Evidence of VSOEFV is determined for software products based on actual sales prices for the product sold to a similar class of customer and based on pricing strategies set forth in the Company’s price book. Evidence of VSOEFV for services (implementation and consulting) is based upon standard billing rates and the estimated level of effort for individuals expected to perform the related services. The Company establishes VSOEFV for maintenance agreements using the percentage method such that VSOEFV for maintenance is a percentage of the license fee charged annually for a specific software product, which in most instances is 20% of the portion of arrangement fees allocated to the software license element.

Although substantially all of the Company’s current software licenses provide for a fixed price license fee, some licenses instead provide for the customer to pay a monthly license fee based on actual use of the software product. The level of license fees earned by the Company under these arrangements will vary based on the actual amount of use by the customer. Revenue under these arrangements is recognized on a monthly basis as the usage becomes determinable.

Software Maintenance Fees. In connection with the sale of a software license, a customer may elect to purchase software maintenance services. Most of the customers that purchase software licenses from the Company also purchase software maintenance services, which typically are renewed annually. The Company charges an annual maintenance fee, which is typically a percentage of the initial software license fee. The annual maintenance fee generally is paid to the Company at the beginning of the maintenance period, and the Company recognizes these revenues ratably over the term of the related contract. If the annual maintenance fee is not paid at the beginning of the maintenance period, the Company defers revenue recognition until the time that the maintenance fee is paid by the customer. The Company normally continues to provide maintenance service while awaiting payment from customers. When the payment is received, revenue is recognized for the period that revenue was previously deferred. This may result in volatility in software maintenance revenue from period to period.

Software Implementation Fees. In connection with the sale of a software license, a customer may elect to purchase software implementation services, including software enhancements and other software services. Most of the customers that purchase software licenses from the Company also purchase software implementation services. TheThe Company prices its implementation services on a time-and-materials or on a fixed-price basis, and the Company recognizes the related revenues as services are performed. Costs associated with these engagements are expensed as incurred.

Outsourcing Services Fees. While outsourcing revenue has been minimal to date, we currently recognize revenue based on the number of items processed. These services are currently billed on a monthly basis.

The Company’s contracts typically do not include right of return clauses, and as a result, the Company does not record a provision for returns.

Royalties

In connection with software license, maintenance, and ~~maintenance~~consulting agreements, entered into with certain banks and purchase agreements with vendors under which the Company acquired software technology used in products sold to its customers, the Company is required to pay royalties on sales of certain software products. Under these arrangements, the Company ~~accrues~~recognizes royalty expense when the associated revenue is recognized. For current product offerings, the royalty percentages generally range from 20% to 50% of the associated revenues. Approximately ~~$685,000~~$214,000 and ~~$718,000~~$256,000 of royalty expense was recorded under these agreements in the three months ended ~~October 31,~~April 30, 2005 and 2004, ~~and 2003, respectively, and $1.4 million and $1.7 million in the nine months ended October 31, 2004 and 2003.~~respectively. Royalty expense is included as a component of the cost of consulting fees, cost of software license fees and cost of software maintenance fees in the accompanying ~~condensed~~ consolidated statements of operations.

Deferred Revenue

Deferred revenue represents amounts paid by customers under terms specified in consulting, software licensing, and maintenance contracts for which completion of contractual terms or delivery of the software has not occurred.

Deferred revenue and advance payments from customers consist of the following (in thousands):

							April 30,			January 31,
	October 31,			January 31,			2005			2005
	2004			2004
Deferred software maintenance fees	$	24,059		$	44,117		$	27,591		$	33,850
Deferred software implementation and license fees	19,097			22,960			17,654			23,658
	43,156			67,077			45,245			57,508
Less related accounts receivable	(25,590		)	(41,846		)	(21,264		)	(35,327		)
	$	17,566		$	25,231
Net deferred revenue							$	23,981		$	22,181

Research and Development Costs

Research and development costs which are not subject to capitalization under Statement of Financial Accounting Standards ~~(SFAS)~~No. 86, “Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise ~~Marketed,”~~Marketed” (“SFAS 86”), are expensed as incurred and relate mainly to the development of new products, ~~(prior to achieving technological feasibility),~~new applications, new features or enhancements for existing products or applications. Sustaining maintenance activities are expensed as incurred and charged to cost of ~~revenues-software~~revenues — software maintenance fees.

Other income (expense)

Other income (expense) is comprised of the following (in thousands):

												Three Months Ended April 30,
	Three Months Ended October 31,						Nine Months Ended October 31,					2005			2004
	2004			2003			2004			2003
Gain on sale of Cash Services Australia Pty. Limited	$	—		$	—		$	539		$	—	$	—		$	539
Equity in earnings (loss) of Cash Services Australia Pty. Limited	—			68			(17		)	142
Equity in loss of Cash Services Australia Pty. Limited												—			(17		)
Minority share of net loss of Carretek LLC	234			—			454			—		318			86
Foreign exchange gains (losses)	43			161			(245		)	114
Foreign exchange losses												(17		)	(129		)
Other	(2		)	(10		)	1			13		5			5
Total	$	275		$	219		$	732		$	269	$	306		$	484

In April 2004, the Company sold its 25% interest in Cash Services Australia Pty. Limited. The carrying value of this investment was approximately $383,000 and the Company received $922,000 in proceeds collected in May 2004. As a result of this transaction, the Company recorded a $539,000 gain.

~~During fiscal 2003, the~~The Company ~~formed~~owns a 51% interest in Carretek LLC (“Carretek”), in which ~~the Company owns a 51% interest, to offer~~offers financial institutions ~~offshore centric~~offshore-centric outsourcing of their business processes. The minority interest in this loss was recorded in other income (expense) and was ~~$234,000~~$318,000 and $0$86,000 for the three months ended ~~October 31,~~April 30, 2005 and 2004, ~~and 2003, and $454,000 and $0 for the nine months ended October 31, 2004 and 2003,~~ respectively.

Income Taxes

The Company accounts for income taxes using the liability method, whereby deferred tax assets and liabilities are determined based on differences between financial reporting and the tax basis of assets and liabilities measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is adjusted by a valuation allowance, if necessary, to recognize the extent to which, based on available evidence, it is more likely than not that the future tax benefits will not be realized.

Earnings Per Share

Basic earnings per share is computed using the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is computed using the weighted average number of shares of common stock outstanding during each period and common equivalent shares consisting of stock options and unvested restricted stock (using the treasury stock method), if such stock options and unvested restricted stock have a dilutive ~~effect in the aggregate.~~

effect.

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for its employee and director stock options. Under APB 25, if the exercise price of a stock option equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. In October 1995, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 123, “Accounting for Stock-Based Compensation.” SFAS 123 allows the Company to continue to follow the present APB Opinion 25 guidelines, but requires pro-forma disclosures of net income and earnings per share as if the Company had adopted the provisions of the Statement. In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation —– Transition and Disclosure —– an Amendment of FASB Statement No.123,” which provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. The Company continues to account for stock-based compensation under the provisions of APB Opinion 25 using the intrinsic value method.

The stock compensation expense recorded under the intrinsic value method is primarily the result of restricted common stock issued to employees and officers in fiscal years 2004 and 2003. The Company is amortizing the compensation expense on a straight line basis over the period that the restrictions on the common stock lapse.

The Company recorded $128,000 and $35,000 of compensation expense during the three months periods ended April 30, 2005 and 2004, respectively. 419,470 unvested restricted common shares remain outstanding at April 30, 2005.

Had compensation cost for stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans in accordance with the provisions of SFAS 123, net income (loss) and net income (loss) per share would have been as follows (in thousands, except per share data):

													Three Months Ended April 30,
	Three Months Ended October 31,						Nine Months Ended October 31,						2005			2004
	2004			2003			2004			2003
Net income (loss), as reported	$	513		$	1,337		$	(100	)	$	2,301		$	498		$	(812	)
Stock compensation expense recorded under the intrinsic value method	148			52			324			87			128			35
Pro forma stock compensation expense computed under the fair value method	(1,493		)	(1,113		)	(3,914		)	(3,390		)	(767		)	(951		)
Pro forma net income (loss)	$	(832	)	$	276		$	(3,690	)	$	(1,002	)
Pro forma net loss													$	(141	)	$	(1,728	)

Basic earnings (loss) per common share, as reported	$	0.02		$	0.06		$	0.00		$	0.10		$	0.02		$	(0.03	)
Diluted earnings (loss) per common share, as reported	$	0.02		$	0.05		$	0.00		$	0.10		$	0.02		$	(0.03	)
Pro forma basic earnings (loss) per common share	$	(0.03	)	$	0.01		$	(0.15	)	$	(0.04	)
Pro forma diluted earnings (loss) per common share	$	(0.03	)	$	0.01		$	(0.15	)	$	(0.04	)
Pro forma basic loss per common share													$	(0.01	)	$	(0.07	)
Pro forma diluted loss per common share													$	(0.01	)	$	(0.07	)

The Company calculated the estimated fair value of each stock option using the Black-Scholes option-pricing model and utilized the following assumptions:

													Three Months Ended April 30,
	Three Months Ended October 31,						Nine Months Ended October 31,						2005			2004
	2004			2003			2004			2003
Volatility	0.746			0.954			0.794			0.955			.905			.887
Weighted-average expected lives	4.500			4.500			4.500			4.500			4.00			4.50
Expected dividend yields	—			—			—			—			—			—
Weighted-average risk-free interest rates	4.25		%	3.21		%	3.93		%	2.55		%	3.83		%	2.79		%
Weighted-average fair value of options granted	$	5.62		$	3.90		$	5.93		$	3.09		$	4.32		$	6.20

Risks and Uncertainties

The Company’s future results of operations and financial condition could be impacted by the following factors, among others: dependence on the banking industry, decline in check volumes, fluctuations in operating results, lack of long-term agreements, dependence on key personnel, ~~product liability,~~ rapid technological change and dependence on new products, focus on providing business process outsourcing with significant offshore component, ability to attract and retain qualified personnel, customer concentration, competition, ~~potential strategic alliances and acquisitions,~~ proprietary rights, infringement claims, dependence on third parties for technology licenses, liability claims, ~~pending lawsuits, stock price fluctuations,~~our ability to protect our information technology infrastructure, international operations, ~~use of independent contractors,~~ changing government and tax regulations, ~~anti-takeover provisions in our charter,~~stock price fluctuations, impairment of goodwill or intangible assets, ~~and~~ realization of revenue from contracted sales, potential sales and ~~backlog.~~backlog, changes in the accounting treatment of stock options and other share-based compensation and pending class action lawsuits.

Financial Guarantees

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee or indemnification. FIN 45 also requires additional disclosure by a guarantor in its interim and annual consolidated financial statements about its obligations under certain guarantees and indemnifications. The following is a summary of the ~~applicable guarantees and indemnifications:~~agreements that the Company has determined are within the scope of FIN 45:

Under the terms of the majority of the Company’s software license agreements with its customers, the Company agrees that in the event the software sold infringes upon any patent, copyright, trademark, or any other proprietary right of a third party, it will indemnify its customer licensee against any loss, expense, or liability from any damages that may be awarded against its customer. The Company includes this infringement indemnification in all of its software license agreements. In the event the customer cannot use the software or service due to infringement and the Company cannot obtain the right to use, replace or modify the license or service in a commercially feasible manner so that it no longer infringes, then the Company may terminate the license and provide the customer a pro-rata refund of the fees paid by the customer for the infringing license or service. The Company has recorded no liability associated with this indemnification, as it is not aware of any pending or threatened infringement actions that are probable losses. The Company believes the estimated fair value of these intellectual property indemnification clauses is minimal.

The Company has agreed to indemnify members of the board of directors, officers and certain key employees of the Company if they are made a party or are threatened to be made a party to any proceeding ~~(other than an action by or in the right of the Company)~~ by reason of the fact that they are acting in their capacities on behalf of the Company, or by reason of anything done or not done by them in any such capacities. The indemnity is for any and all expenses and liabilities of any type whatsoever (including but not limited to, judgments, fines and amounts paid in settlement) actually and reasonably incurred by the directors or officers in connection with the investigation, defense, settlement or appeal of such proceeding, provided they acted in good faith. The Company maintains insurance coverage for directors and officers liability (“D&O insurance”). No maximum liability is stipulated in these agreements that include indemnifications of members of the board of directors, officers and certain key employees of the Company. The Company has recorded no liability associated with these indemnifications as it is not aware of any pending or threatened actions or claims against ~~its~~the members of its board of directors or officers that are probable losses in excess of amounts covered by its D&O insurance. As a result of the insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.

Recently Issued Accounting Standards

On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123. SFAS No. 123 (R) supersedes APB No. 25, and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123 (R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Pro forma disclosure is no longer an alternative. The Company expects to adopt SFAS No. 123 (R) in the first quarter of fiscal 2006. SFAS No. 123 (R) permits companies to adopt its requirements using one of two methods:

• A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123 (R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123 (R) that remain unvested on the effective date.

• A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The Company is still assessing the appropriate transition method.

~~Recently Issued Accounting Standards~~As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using the APB No. 25 intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123 (R)’s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position and cash flows. Had we adopted SFAS No. 123 (R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share contained in Note 2 above under the caption Stock Based Compensation. Statement No. 123 (R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow. This requirement currently does not have an effect on the Company as all of our deferred tax benefits are fully reserved, with a valuation allowance.

In January 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 41 ~~(FIN 46)~~(“FIN 46”).” In December 2003, the FASB modified FIN 46 to make certain technical corrections and address certain implementation issues that had arisen ~~subsequently~~(subsequently referred to as “FIN 46R”). FIN 46 and FIN 46R ~~provides~~provide a new framework for identifying variable interest entities ~~(VIEs)~~(“VIEs”) and determining when a company should include these assets, liabilities, non-controlling interests and results of activities of a VIE in its consolidated financial statements.

In general, a VIE is a corporation, partnership, limited liability corporation, trust or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.

The Company adopted the provisions of FIN 46 and FIN 46R as of April 30, 2004. The effect of adopting the provisions of FIN 46 and FIN 46R was not material.

In November 2002, the EITF reached a consensus on Issue 00-21, “Multiple Deliverable Revenue Arrangements.” EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. It also addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. The guidance in EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003, with early application permitted. Companies may elect to report the change in accounting as a cumulative effect of a change in accounting principle in accordance with APB Opinion 20, “Accounting Changes” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements (an amendment of APB Opinion No. 28).” The adoption of EITF 00-21 did not have a significant impact on the Company’s accounting for multiple element arrangements.

3. Goodwill and Intangible Assets

~~The Company adopted SFAS No. 142,~~ “Goodwill ~~and Other Intangible Assets,”~~ ~~effective February 1, 2002. Under SFAS 142, goodwill~~ and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment ~~tests in accordance with this statement.~~tests. Other intangible assets, which include acquired developed technology and customer relationships, ~~will continue to be~~are amortized over their estimated useful lives.

Customer relationships with definite useful lives are amortized on a straight-line basis, which resulted in amortization expense of $350,000 ~~for~~during the three months ended ~~October 31,~~April 30, 2005 and 2004, ~~and 2003, respectively, and $1.1 million for the nine months ended October 31, 2004 and 2003.~~respectively.

The following table sets forth the estimated amortization expense of customer relationships for the indicated fiscal years ending January 31 (in thousands):

Period

Amount

November 1, 2004 — January 31, 2005

$
350

Fiscal year ending January 31, 2006

1,400

Fiscal year ending January 31, 2007

1,400

Fiscal year ending January 31, 2008

467

Certain accrued liabilities were recorded during the acquisition of Check Solutions Company in June 2001. During the nine months ended October 31, 2004, these estimates were revised and $428,000 of these accrued liabilities were reversed and recorded as an adjustment to Goodwill.

Year	Amount
2006	$	1,050
2007	1,400
2008	467

4. Revolving Credit Agreement

The Company is a party to a revolving credit agreement with a group of banks providing for a commitment amount of $30.0 million and a maturity date of July 31, 2006. The Company did not have any borrowings outstanding under the revolving credit agreement at April 30, 2005. Borrowings under the credit agreement ~~as amended,~~ currently bear interest equal to either the greater of prime or federal funds rate plus a margin ranging from 1.25% to 2.25% depending on the Company’s ratio of funded debt to Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”), or LIBOR plus a margin equal to 2.75% to 3.75% depending on the Company’s ratio of funded debt to EBITDA. Interest payments are due quarterly. The Company is required to pay a commitment fee equal to 0.50% on the unused amount of the revolving credit agreement. The revolving credit agreement contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of specified interest coverage, ratio of EBITDA to funded debt, and ratio of 80% of accounts receivable, cash and short-term investments to funded debt. Additionally, the payment of dividends is precluded except upon approval of the banks. Substantially all of the Company’s assets collateralize the revolving credit agreement. As of ~~October 31, 2004,~~April 30, 2005, the Company is in compliance with the covenants of the revolving credit ~~agreement, as amended.~~agreement.

~~The Company did not have any borrowings outstanding under the revolving credit agreement at October 31, 2004.~~ Interest expense, including the commitment fee and exclusive of the amortization of deferred loan costs on the credit agreement was ~~$38,000~~$37,000 and ~~$166,000~~$39,000 for the three months ended ~~October 31,~~April 30, 2005 and 2004, ~~and 2003, respectively, and $132,000 and $707,000 for the nine months ended October 31, 2004 and 2003.~~respectively.

5. Provision for Income Taxes

The Company has established a valuation allowance to reserve its net deferred tax assets at ~~October 31, 2004~~April 30, 2005 because the more likely than not criteria for future realization of the Company’s net deferred tax assets specified in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” (“SFAS No. 109”) were not met.

The ~~net~~ tax provision was ~~$114,000~~$81,000 and ~~$464,000~~$0 for the three ~~and nine~~ months ended ~~October 31,~~April 30, 2005 and 2004, respectively, which consists of a provision for ~~state and~~ foreign taxes. ~~The net~~No U.S. Federal or State tax ~~provision of $146,000 and $372,000 for~~expense was recorded in the three ~~and nine~~ months ended ~~October 31, 2003 consists~~April 30, 2005 due to the availability of ~~a provision for state and foreign taxes.~~net operating losses from prior years. No U.S. Federal tax benefit was recorded during the three months ended April 30, 2004 due to the uncertainty regarding the Company’s ability to generate taxable income, and resulting uncertainty relative to the recoverability of deferred tax assets.

6. Benefit Plans

~~Incentive Compensation Plans~~401(k) Plan

~~Profit Sharing Plan~~

The Company has adopted a ~~profit sharing~~ plan pursuant to Section 401(k) of the Internal Revenue Code (“the Code”) whereby participants may contribute a percentage of compensation not in excess of the maximum allowed under the Code. The plan provides for a matching contribution by the ~~Company.~~Company which was reinstated as of January 31, 2004. Employer matching contributions amounted to ~~$102,000~~$338,000 and $0$165,000 for the three months ended ~~October 31,~~April 30, 2005 and 2004, ~~and 2003, respectively, and $431,000 and $0 for the nine months ended October 31, 2004 and 2003.~~respectively. The Company may make additional contributions at the discretion of the Board of Directors. No discretionary contributions were made during the three ~~and nine~~ months ended ~~October 31, 2004~~April 30, 2005 and ~~2003.~~2004.

Incentive Compensation Plans

~~Effective May 3, 2004, the variable compensation plan was terminated. The Company did not record expense under this plan for the three or nine months ended October 31, 2004 and 2003.~~

The Carreker Incentive Bonus Plan (“CIBP”) awards employees bonuses based on the Company’s ~~and~~or the applicable business unit’s operating results. Substantially all employees are eligible to receive cash awards under the CIBP. Awards from this plan are paid to employees subsequent to the end of the fiscal year. In the three months ended ~~October 31,~~April 30, 2005 and 2004, ~~and 2003,~~ the Company recorded expense under this plan of approximately ~~$484,000~~$244,000 and ~~$509,000, respectively. In the nine months ended October 31, 2004 and 2003, the Company recorded expense under this plan of approximately $1.0 million and $1.6 million,~~$106,000, respectively.

The Company pays discretionary bonuses ~~from time to time~~ to key ~~employees.~~employees based primarily on the extent to which individuals meet agreed-upon objectives for the year. The Company recorded discretionary bonus expense of approximately ~~$703,000~~$265,000 and ~~$421,000~~$101,000 for the three months ended ~~October 31,~~April 30, 2005 and 2004, ~~and 2003, respectively, and $1.1 million and $639,000 for the nine months ended October 31, 2004 and 2003.~~respectively.

1817

7. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share amounts):

										Three Months Ended April 30,
	Three Months Ended October 31,				Nine Months Ended October 31,					2005		2004
	2004		2003		2004			2003
Basic earnings (loss) per share:
Net income	$	513	$	1,337	$	(100	)	$	2,301
Net income (loss)										$	498	$	(812	)

Weighted average shares outstanding	24,821		23,812		24,623			23,635		24,425		24,376

Basic earnings (loss) per share	$	0.02	$	0.06	$	0.00		$	0.10	$	0.02	$	(0.03	)

Diluted earnings (loss) per share:
Net earnings (loss)	$	513	$	1,337	$	(100	)	$	2,301
Net income (loss)										$	498	$	(812	)

Weighted average shares outstanding	24,821		23,812		24,623			23,635		24,425		24,376
Assumed conversion of employee stock options	768		833		—			185
Assumed conversion of employee stock options and unvested restricted stock										442		—
Shares used in diluted earnings per share calculation	25,589		24,645		24,623			23,820		24,867		24,376

Diluted earnings (loss) per share	$	0.02	$	0.05	$	0.00		$	0.10	$	0.02	$	(0.03	)

Options totaling ~~1,955,533~~2,614,595 and ~~2,516,118,~~2,219,882 for the three months ~~ended October 31,~~April 30, 2005 and 2004, ~~and 2003,~~ respectively, ~~and 1,480,522 and 4,218,207, for the nine months ended October 31, 2004 and 2003~~ have been excluded from the diluted earnings per share computation as the options were anti-dilutive.

8. Contingencies

On June 15, 2004, by mutual agreement between the parties, 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 seeks redress (the form of, 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.

On June 2, 2003, in the District Court, Dallas County, Texas, Walter Evans brought a shareholders’ derivative action, for the benefit 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, and Ernst & Young, LLP 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~~Company’s independent ~~auditors~~registered public accounting firm Ernst & Young LLP. The complaint seeks unspecified amounts of compensatory damages, as well as interest and costs, including legal fees from the director defendants.

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 styled In re Carreker Corporation Securities Litigation, Civil Action No. 303CV0250-M. ~~Also, on March 3,~~On October 14, 2003 ~~Claude Alton Coulter~~the plaintiffs filed ~~a purported class action lawsuit (Civil~~their 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, ~~allege~~alleged 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 complaints~~defendants, 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’s~~Carreker 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 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), 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.

The Company 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~~Company’s business, results of operations, financial condition and cash flows.

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 are not expected to have a material adverse effect on the Company’s financial position or results of operations.

2019

9. Business Segments and Revenue Concentration

The tables below show revenues and income (loss) from operations for the periods indicated for our three reportable business segments: Revenue Enhancement, Global Payments Technologies and Global Payments Consulting. Certain prior year amounts have been reclassified to conform with the current year business segment presentation. Our customer projects are sold on a solution basis, so it is necessary to break them down by segment and allocate accordingly. Included in “Corporate Unallocated” are costs related to selling and marketing, unallocated corporate overhead expense and general software management. Business segment results, which include costs ~~such as~~for research and development ~~expense~~ as well as product royalty expense, the amortization and impairment of goodwill and intangible assets, the write-off of capitalized software costs and restructuring and other charges, were as follows (in thousands):

	Three Months ended April 30, 2005
	Revenue Enhancement		Global Payments Technologies		Global Payments Consulting			Corporate Unallocated			Total
Revenues:
Consulting fees	$	7,722	$	50	$	546		$	—		$	8,318
Software license fees	301		3,058		—			—			3,359
Software maintenance fees	114		10,970		228			—			11,312
Software implementation fees	475		3,550		109			—			4,134
Outsourcing services fees	—		—		—			257			257
Out-of-pocket expense reimbursements	387		340		91			—			818
Total revenues	$	8,999	$	17,968	$	974		$	257		$	28,198

Income (loss) from operations before amortization of customer relationships and restructuring and other charges	$	3,938	$	2,554	$	(324	)	$	(5,489	)	$	679

Amortization of customer relationships	—		350		—			—			350
Restructuring and other charges (credits)	—		131		(24		)	(12		)	95
Income (loss) from operations	$	3,938	$	2,073	$	(300	)	$	(5,477	)	$	234

Three Months ended October 31, 2004

Revenue Enhancement

Global Payments Technologies

Global Payments Consulting

Corporate Unallocated

Total

Revenues:

Consulting fees

$
7,141

$
—

$
789

$
—

$
7,930

Software license fees

25

5,676

—

—

5,701

Software maintenance fees

371

10,956

164

—

11,491

Software implementation fees

161

4,393

68

—

4,622

Outsourcing services fees

—

—

—

50

50

Out-of-pocket expense reimbursements

289

369

155

—

813

Total revenues

$
7,987

$
21,394

$
1,176

$
50

$
30,607

Income (loss) from operations before amortization of customer relationships and restructuring and other charges

$
3,350

$
4,754

$
(588
)
$
(6,534
)
$
982

Amortization of customer relationships

—

350

—

—

350

Restructuring and other charges

—

—

199

67

266

Income (loss) from operations

$
3,350

$
4,404

$
(787
)
$
(6,601
)
$
366

	Three Months ended October 31, 2003														Three Months ended April 30, 2004
	Revenue Enhancement		Global Payments Technologies			Global Payments Consulting			Corporate Unallocated			Total			Revenue Enhancement		Global Payments Technologies		Global Payments Consulting			Corporate Unallocated			Total
Revenues:
Consulting fees	$	6,151	$	35		$	210		$	—		$	6,396		$	8,487	$	36	$	534		$	—		$	9,057
Software license fees	646		6,350			30			—			7,026			179		5,644		33			—			5,856
Software maintenance fees	410		11,158			202			—			11,770			169		10,688		227			—			11,084
Software implementation fees	301		4,401			281			—			4,983			156		2,557		166			—			2,879
Out-of-pocket expense reimbursements	378		759			91			—			1,228			490		300		100			—			890
Intercompany revenue	—		(126		)	126			—			—
Total revenues	$	7,886	$	22,577		$	940		$	—		$	31,403		$	9,481	$	19,225	$	1,060		$	—		$	29,766

Income (loss) from operations before amortization of customer relationships and restructuring and other charges	$	2,985	$	5,935		$	(762	)	$	(6,608	)	$	1,550
Income (loss) from operations before amortization of customer relationships and merger, restructuring and other charges															$	4,615	$	4,445	$	(566	)	$	(6,865	)	$	1,629

Amortization of customer relationships	—		350			—			—			350			—		350		—			—			350
Restructuring and other charges	—		(540		)	—			311			(229		)	1,719		212		—			584			2,515
Income (loss) from operations	$	2,985	$	6,125		$	(762	)	$	(6,919	)	$	1,429		$	2,896	$	3,883	$	(566	)	$	(7,449	)	$	(1,236	)

2120

Nine Months ended October 31, 2004

Revenue Enhancement

Global Payments Technologies

Global Payments Consulting

Corporate Unallocated

Total

Revenues:

Consulting fees

$
24,979

$
350

$
2,172

$
—

$
27,501

Software license fees

217

15,884

33

—

16,134

Software maintenance fees

755

31,426

626

—

32,807

Software implementation fees

476

10,234

433

—

11,143

Outsourcing services fees

—

—

—

60

60

Out-of-pocket expense reimbursements

1,083

936

346

—

2,365

Total revenues

$
27,510

$
58,830

$
3,610

$
60

$
90,010

Income (loss) from operations before amortization of customer relationships and restructuring and other charges

$
12,959

$
12,302

$
(1,417
)
$
(20,055
)
$
3,789

Amortization of customer relationships

—

1,050

—

—

1,050

Restructuring and other charges

1,747

(639
)
199

1,671

2,978

Income (loss) from operations

$
11,212

$
11,891

$
(1,616
)
$
(21,726
)
$
(239
)

Nine Months ended October 31, 2003

Revenue Enhancement

Global Payments Technologies

Global Payments Consulting

Corporate Unallocated

Total

Revenues:

Consulting fees

$
20,032

$
164

$
1,153

$
—

$
21,349

Software license fees

2,368

19,557

30

—

21,955

Software maintenance fees

879

33,229

656

—

34,764

Software implementation fees

722

13,023

640

—

14,385

Out-of-pocket expense reimbursements

1,242

1,739

386

—

3,367

Intercompany revenue

—

(165
)
165

—

—

Total revenues

$
25,243

$
67,547

$
3,030

$
—

$
95,820

Income (loss) from operations before amortization of customer relationships and restructuring and other charges

$
10,413

$
19,950

$
(2,869
)
$
(22,039
)
$
5,455

Amortization of customer relationships

—

1,050

—

—

1,050

Restructuring and other charges

—

(529
)
346

1,416

1,233

Income (loss) from operations

$
10,413

$
19,429

$
(3,215
)
$
(23,455
)
$
3,172

During the three months ended July 31, 2003, the Company formed Carretek LLC (“Carretek”), in which the Company owns a 51% interest, to offer financial institutions offshore-centric outsourcing of their business ~~processes.~~processes and IT services needs. During July 2004, Carretek signed its first contract to perform outsourced services with a customer. As this outsourcing business iscontinues to be in the development phase and its operations are immaterial, the financial results for the three months ended April 30, 2005 and ~~nine months ended October 31,~~ 2004 ~~and 2003, respectively,~~ are contained in the Corporate-Unallocated business segment in the tables above.

~~Since Carretek’s inception,~~For the three months ended April 30, 2005, Carretek recorded $257,000 of revenue and recorded expense of $904,000. For the three months ended April 30, 2004, Carretek recorded $0 revenue and recorded expense of $174,000. Accordingly, the 49% share relating to the minority interest in this loss, which was $318,000 and $86,000 for the three months ended April 30, 2005 and 2004, respectively, was recorded in other income in the accompanying consolidated statements of operations. The Company and its partner have funded Carretek ~~with an~~to date in the aggregate amount of ~~approximately $1.1~~$3.2 million, ~~from both partners.~~consisting of $100,000 ~~was~~ in equity and ~~another $980,000~~$3.1 million in the form of ~~a note payable. The $481,000 minority interest in the note payable is reflected as a long-term liability in the accompanying condensed consolidated balance sheets.~~additional cash advances.

The following table summarizes revenues, exclusive of out-of-pocket expense reimbursements, derived from the Company’s largest customer and top five customers during the periods indicated.

									Three Months Ended April 30,
	Three Months Ended October 31,				Nine Months Ended October 31,				2005		2004
	2004		2003		2004		2003
Single customer	19.3	%	10.5	%	13.1	%	9.6	%	14	%	11	%
Top five customers	40.7	%	33.5	%	32.6	%	31.7	%	44	%	36	%

Wells Fargo accounted for approximately 14% of total revenues during the three months ended April 30, 2005, Amsouth Bank accounted for approximately 11% of total revenues during the three months ended April 30, 2004.

The Company markets its solutions in several foreign countries. Revenues, exclusive of out-of-pocket expense reimbursements, for the ~~three and nine months ended~~periods indicated attributed to countries based on the location of the customers, were as follows ($ in thousands):

Three Months Ended

Three Months Ended

October 31, 2004

October 31, 2003

Amount

Percent of total revenues

Amount

Percent of total revenues

United States

$
24,712

83
%
$
24,293

81
%
Europe

1,966

7

2,143

7

Canada

1,348

4

1,565

5

Asia Pacific

946

3

1,244

4

South Africa

631

2

679

2

Other

191

1

251

1

Total revenues

$
29,794

100
%
$
30,175

100
%

	Nine Months Ended				Nine Months Ended				Three Months Ended				Three Months Ended
	October 31, 2004				October 31, 2003				April 30, 2005				April 30, 2004
	Amount		Percent of total revenues		Amount		Percent of total revenues		Amount		Percent of total revenues		Amount		Percent of total revenues
United States	$	67,916	78	%	$	74,828	81	%	$	20,043	73	%	$	22,194	77	%
Europe	6,511		7		6,400		7		2,334		9		2,375		8
Canada	4,690		5		5,004		5		1,861		7		1,525		5
Asia Pacific	3,261		4		3,498		4		1,062		4		1,356		5
South Africa	4,628		5		2,218		2		2,010		7		1,208		4
Other	639		1		505		1		70		—		218		1
Total revenues	$	87,645	100	%	$	92,453	100	%	$	27,380	100	%	$	28,876	100	%

2321

10. Restructuring and Other Charges

The Company recorded various ~~merger,~~ restructuring and other charges and ~~credits,~~(credits) during the three months ended April 30, 2005 and 2004, respectively, as follows (in thousands):

Workforce Reductions

Credit relating to CheckFlow Suite

Facility Closures

EPG Litigation Settlement

Legal and Professional Fees

Total

YTD 2003:

Quarterly period ended April 30, 2003

$
545

$
—

$
—

$
—

$
139

$
684

Quarterly period ended July 31, 2003

648

—

—

—

130

778

Quarterly period ended October 31, 2003

(251
)
—

(119
)
—

141

(229
)
Total YTD 2003

$
942

$
—

$
(119
)
$
—

$
410

$
1,233

YTD 2004:

Quarterly period ended April 30, 2004

308

—

—

1,686

521

2,515

Quarterly period ended July 31, 2004

192

(1,215
)
—

14

1,206

197

Quarterly period ended October 31, 2004

246

—

—

—

20

266

Total YTD 2004

$
746

$
(1,215
)
$
—

$
1,700

$
1,747

$
2,978

	Workforce Reductions		EPG Litigation Settlement		Legal and Professional Fees		Other			Total

YTD 2004:
Quarterly period ended April 30, 2004	308		1,686		521		—			2.515
Total YTD 2004	$	308	$	1,686	$	521	$	—		$	2,515

YTD 2005:
Quarterly period ended April 30, 2005	127		—		—		(32		)	95
Total YTD 2005	$	127	$	—	$	—	$	(32	)	95

Quarter Ended April 30, ~~2003~~2005

The Company recorded ~~$545,000~~$127,000 in restructuring and other charges during the three month period ended April 30, ~~2003,~~2005, principally associated with the separation of 17 employees, within both the Corporate and Global Payments Consulting (“GPC”) business segments. During the quarterly period ended April 30, 2003, the Company recorded a charge of $139,000 relating to legal and professional fees relating to the Company’s restatement efforts and the legal actions described in Note 8.

~~Quarter Ended July 31, 2003~~

6 employees. The Company ~~recorded $648,000 in restructuring and other charges during~~also lowered its estimate by $32,000 for the ~~three month period ended July 31, 2003, principally~~costs associated with the ~~separation~~discontinuance of ~~9 employees, within both the Corporate and GPC business segments. During the quarterly period ended July 31, 2003, the Company~~one of its software offerings originally recorded ~~a charge of $130,000 relating to legal fees relating to the legal actions described~~ in ~~Note 8.~~January 2004.

~~Quarter Ended October 31, 2003~~

The Company recorded $170,000 in restructuring and other charges during the three month period ended October 31, 2003, principally associated with the separation of 3 employees, within the Corporate business segment. During the quarterly period ended October 31, 2003, the Company recorded a charge of $141,000 relating to legal fees relating to the legal actions described in Note 8.

Additionally, during the three months ended October 31, 2003, the Company reversed $421,000 primarily related to the true-up of termination benefits as actual costs were lower than estimated amounts. Additionally, $119,000 was reversed when estimated costs to close certain facilities were lower than our original estimates.

Quarter Ended April 30, 2004

The Company recorded $308,000 in restructuring and other charges during the three month period ended April 30, 2004, principally associated with the separation of 10 employees. During the quarterly period ended April 30, 2004, the Company recorded a charge of $521,000 relating to legal and professional fees relating to the Company’s legal actions described in Note 8. Approximately $462,000 of the $521,000 of legal and professional fees were recorded as selling, general and administrative costs during the quarter ended April 30, 2004 and reclassified to restructuring and other charges in the quarter ended July 31, 2004.

The Company expensed ~~approximately~~ $1.686 million for compensatory damages to EPG after the jury returned a verdict in favor of EPG on one claim and Carreker on three claims.

~~Quarter Ended July 31,~~ This litigation ultimately settled in June 2004

for $1.7 million. The Company recorded $192,000 in restructuring and other charges during the three month period ended July 31, 2004, principally associated with the separation of 8 employees. During the quarter ended July 31, 2004, the Company recorded a charge of ~~$36,000~~$521,000 relating to legal and professional fees relating to ~~the Company’s shareholder~~these legal ~~actions described in Note 8.~~

An additional $14,000 was expensed and the entire $1.7 million EPG settlement was paid to the plaintiff. Additionally, the Company recorded a charge for the litigation costs related to this legal action totaling $1.2 million.

The Company received a final payment of $455,000 from a customer in the settlement with one of its original CheckFlow Suite customers. This payment was recorded directly to this reserve. Concurrently, based on revised cost estimates, the Company lowered its estimate of the cost to develop and install any additional software, or software modifications, with these customers and reversed approximately $1.2 million of this reserve.actions.

~~Quarter Ended October 31, 2004~~

The Company recorded $247,000 in restructuring and other charges during the three month period ended October 31, 2004, principally associated with the separation of 6 employees. During the quarter ended October 31, 2004, the Company recorded a charge of $20,000 relating to legal and professional fees relating to the Company’s shareholder and other legal actions described in Note 8.

The activity related to the accrued merger and restructuring costs during the three ~~and nine~~ months ended ~~October 31, 2004~~April 30, 2005 is as follows (in thousands):

	Workforce Reductions			Charges/ Credits relating to CheckFlow Suite			Facility Closures		Other			Total			Workforce Reductions			Charges relating to CheckFlow Suite		Facility Closures			Other			Total
Balance at January 31, 2004	$	500		$	1,296		$	5	$	97		$	1,898

Balance at January 31, 2005															$	652		$	200	$	49		$	103		$	1,004

Additions to reserve balance:
Severance charges	308			—			—		—			308			127			—		—			—			127
Reductions to reserve balances:
Cash paid	(412		)	(29		)	—		(5		)	(446		)	(494		)	—		(44		)	—			(538		)
Balance at April 30, 2004	396			1,267			5		92			1,760

Additions to reserve balance:
Severance charges	192			—			—		—			192
Cash received from customer	—			455			—		—			455
Reductions to reserve balances:
Cash paid	(495		)	(149		)	—		(12		)	(656		)
Change in estimate	—			(1,215		)	—		—			(1,215		)	—			—		—			(32		)	(32		)
Balance at July 31, 2004	93			358			5		80			536

Additions to reserve balance:
Severance charges	247			—			—		—			247
Cash received from customer	—			—			—		46			46
Reductions to reserve balances:
Cash paid	(121		)	(91		)	—		(23		)	(235		)
Change in estimate	—			—			—		—			—
Balance at October 31, 2004	$	219		$	267		$	5	$	103		$	594
Balance at April 30, 2005															$	285		$	200	$	5		$	71		$	561

The Company anticipates the remaining reserve accruals at April 30, 2005 will be paid or remaining customer obligations completed within the next 12 months.

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Item 2.2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

All statements other than statements of historical fact contained in this report, including statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” concerning our financial position and liquidity, results of operations, prospects for future growth, and other matters, are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause our results to differ materially from the results discussed in, or contemplated by, such forward-looking statements include the risks described under “Business —– Forward Looking Statements and Risk Factors” contained in our Form 10-K for the year ended January 31, ~~2004,~~2005, as filed with the Securities and Exchange Commission (SEC). Such risks include, without limitation: dependence on the banking industry, decline in check volumes, fluctuations in operating results, lack of long-term agreements, dependence on key personnel, product liability, rapid technological change and dependence on new products, focus on providing business process outsourcing with significant offshore components, ability to attract and retain qualified personnel, customer concentration, competition, ~~potential strategic alliances and acquisitions,~~ proprietary rights, infringement claims, dependence on third parties for technology licenses, liability claims, ~~pending lawsuits, stock price fluctuations,~~our ability to protect our information technology infrastructure, international operations, ~~use of independent contractors,~~ changing government and tax regulations, ~~anti-takeover provisions in our charter and~~stock price fluctuations, impairment of goodwill or intangible ~~assets. In addition, from time to time we provide information regarding our contract sales, potential sales opportunities~~assets, changes in accounting treatment of share-based compensation and ~~backlog and our expectations with regard to~~ the ~~related realization~~resolution of revenues. Our expectations with regard to the realization of revenues from these contract sales, potential sales and backlog are forward-looking statements and are subject to the foregoing risks and those set forth under “Item 5. Other Information” in this report.pending class action lawsuits. All forward-looking statements in this report are expressly qualified in their entirety by the cautionary statements in this paragraph, in the “risk factors” included in our SEC filings and elsewhere in this report.

Overview

~~We provide~~For the last 27 years Carreker Corporation has designed, developed, sold and delivered payments-related software and consulting solutions to financial institutions and financial service providers. ~~We serve all of the top 20 and 75 of the next largest 100 commercial banks in the United States. We also consider other geographic regions to be important elements of our market opportunity.~~ Our products and services ~~traverse~~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 ~~how~~ payments ~~are processed;~~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 ~~improve the alignment of product offerings with our~~maximize clients’ customer ~~needs, hence maximizing~~income streams by aligning their customer ~~income streams.~~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 distinct yet 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. Revenue is primarily derived from license fees, implementation fees and maintenance fees.

~~These~~Revenue Enhancement. This highly specialized practice group 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, 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.

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.

In addition to these three divisions, ~~bring together~~in fiscal 2003 we formed Carretek LLC. Carretek is a transformational business outsourcer for payment and transaction processing jointly owned by Carreker Corporation and Majesco Software, Inc., the ~~capabilities essential to providing the innovation and delivery engines for our products and services.~~U.S. subsidiary of Mastek Limited, a leading Indian outsourcing company with global operations.

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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, the settlement of the EPG legal action along with associated legal fees was recorded on the Restructuring and Other Charges financial statement caption on the Consolidated Statement of Operations.

Liquidity and Cash Flows. Cash and cash equivalents at April 30, 2005 and 2004 totaled $35.7 million and $31.5 million, respectively. During Q1 2005, we generated $2.1 million in cash from operating activities, used $1.1 million of cash for investing activities and generated $250,000 from financing activities. Our primary utilization of cash in Q1 2005 was to invest in our corporate and development lab infrastructure along with the development costs associated with building several new product offerings, especially within our GPT business segment.

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”)

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, 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.~~supplies at minimal logistical services cost.

Specific solutions in the GPT group include:

Solution	Description	Products Offered

Risk Solutions:

Fraud Mitigation and Anti-Money Laundering Compliance	Automated fraud detection and prevention solutions that reduce incidents of check fraud, deposit fraud, check kiting, and electronic fraud. Anti-money laundering solutions screen names and related data against industry blacklists, local high-risk lists and other customized databases. The solution automatically alerts appropriate bank personnel for timely and decisive action and reporting. Scalable solutions are offered for community banks.	FraudLink On-Us, FraudLink Deposit, FraudLink Deposit —– Branch Access Option, Kite, FraudLink Positive Pay, FraudLink eTracker, FraudLink ACHeCK, FraudLink PC, CORE Workflow Manager, CORE AML Filter, eFraudLink.com, Fraud Solutions Consulting

Payment Solutions:

Back Office Processing	Products that bring new efficiencies to back-office operations through leading-edge image, workflow, and RECO (character recognition) technologies.	Adjustments/Express, Exceptions/Express, Express Capture, Express Decision, Input/Express, Inbound Returns/Express, and All Transactions File

Remittance and Payments Processing	Both host and client/server-based platforms for improved productivity in processing retail and wholesale remittance transactions for financial institutions and payments processing for a wide variety of cross-industry applications.	NeXGen Remittance

Conventional Check Capture	An extensive array of enhancement products that add flexibility and usability to IBM’s Check Processing Control System (CPCS) and the IBM 3890/XP series of Document Processors.	Conventional Capture Products, CPCS Enhancements Products, XP/Productivity Tools, Platform Emulation, NeXGen Settlement, NeXGen Balancing, and LTA (Large Table Access)

Check Image Capture	Products and services related to the centralized and distributed capture, quality and inspection assurance, storage and delivery of check images.	ALS & CIMS Products (MVS, AIX, Windows), NeXGen Image Processor, Image Enhancement Products, Reject Repair, RECO Technology, Image POD, Image Delivery Products, Delivery Express QAS Image Inspector, NeXGen Capture, Source Capture Corporate and Source Capture Branch

Solution	Description	Products Offered

Check Image Archive Management	Comprehensive array of check image archive management products that may be tailored to a bank’s unique requirements based on their operational environments and volumes. Carreker offers archive technology for both in-house solutions and shared outsource providers.	Check Image Archive-AIX, Check Image Archive-MVS, Check Image Archive Load

Other Check Image Applications	An array of solutions that address revenue enhancement, risk reduction, and expense reduction issues through the application of image, workflow and RECO technologies.	Image Statements, CDRom Delivery, Input/Express, Express Capture, Payee Name Verification, and Amount Encoding Verification


Global Tracking	A complete bar code tracking system eliminates manual log sheets, automates data gathering and maximizes workflow by tracking accountable mail, branch bags, item volumes, currency bags, incoming domestic and international deposits, outgoing cash letters, exceptions and much more.	Receive Sentry

eMetrics	Performance-measurement software suite that uses historical data to generate key performance indicators, item processing volume data, productivity statistics and quality control benchmarks.	Lumen, ProModel, eiMICR, eiStats, eiQuality, eiPerform

Electronic Check Presentment and Image Exchange	Enables banks to transition from paper-based to electronic payment systems by automating key elements of the processing stream, creation of image replacement documents (“IRD”) ~~as well as improving a bank’s yield from float management.~~ and image quality and usability checking. Aided by Check 21 legislation, these solutions are designed to reduce and eventually eliminate the movement of paper payments through the system, improving productivity, reducing errors, increasing customer satisfaction and reducing fraud.	ExchgLink , IRD Create, IRD Author, Image Inspector, CheckLink, CheckLink PC, Deposit Manager, Branch Truncation Manager and Cnotes

Cash & Cash Logistic Solutions:

ATM Solutions	Advanced ATM monitoring and management, improving ATM availability and ensuring service levels are met. These solutions include an automated ATM monitoring and dispatching system for maximizing network availability; and a real-time Internet-based system for efficient handling of ATM service requests and responses.	eiManager, eiGateway

Cash Solutions	A product suite, now optimized through Web-based software solutions, that dramatically reduces the amount of cash banks, financial institutions and companies need to hold as cash-on-hand throughout vault, branch and ATM networks. These solutions also ~~automate~~enable automation and ~~standardize~~standardization of the cash ordering ~~process.~~process and optimization of transportation. Consulting solutions can drive further efficiency and automation in vault, branch and ATM operations.	iCom, ReserveLink, ReserveLink Plus, Cash Supply Chain Consulting

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Revenue ~~Enhancement Solutions.~~Enhancement. The Revenue Enhancement division includes two business units: RevE and Customer Value Enhancement (“CVE”), 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 Enhancement ~~division~~offering is our ~~business providing~~ CVE solutions that includes EnAct software, ~~and~~ proprietary sales management ~~methodology.~~methodologies and sales training programs. Our CVE solutions assist financial institutions in leveraging central intelligence with local insight. This enables our clients to recognize those customers and prospects representing the greatest value or potential. Our approach is unique and ~~complimentary~~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.~~Carreker~~ Our Global Payments Consulting (“GPC”) division helps financial institutions ~~pro-actively~~proactively plan, prepare and optimize for the regulatory, competitive and technological impacts affecting the financial payments environment. ~~Our Global Payments Consulting (GPC)~~The division provides strategic planning, program management, specialized tools, business applications and implementation advisory services for financial institutions and ~~other~~specialized payments clients. ~~These planning and implementation~~The focus areas for these services include:

• Enterprise payment ~~strategy~~rationalization (strategy through performance optimization)

• Payment research services

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

• ~~Image-enabled payment infrastructure planning~~Transaction clearing optimization solutions (transportation, float, clearing form, clearing partners and funds availability optimization)

• ~~Transportation, float and funds availability optimization~~

•~~Organizational design~~Electronic payment infrastructure planning (image enablement through converged payment environments)

• Consolidation and merger/integration planning

• ~~Program Management~~

•~~Check 21 readiness~~Enterprise Risk support for payments related functions

~~Each service’s objective is to assist our clients in preparing and positioning their organization for the rapidly changing payment landscape.~~

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

• Float Management software ~~products. These~~products – Float Analysis System and Float Management ~~products provide solutions that manage~~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. ~~The products offered consist of Float Analysis System~~

• Payments Clearing Modeling product – Payments Financial Modeling application that allows a bank to create an enterprise virtual profit and ~~Float Pricing System.~~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 USU.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.

Executive Summary

In ~~Q3 2004,~~Q1 2005, we generated revenue of $28.2 million and a net income of ~~$513,000~~$498,000. These results compare to revenue of $29.8 million and ~~on a year-to-date basis we generated~~ a net loss of ~~$100,000.~~$812,000 in Q1 2004. All three of our operating segments had declines in revenue in Q1 2005, as compared to Q1 2004. The ~~banking market~~most significant decline was within our Global Payments Technology (“GPT”) business segment and was the result of $2.9 million of license revenue recorded in ~~which~~Q1 2004 from a license sale to a single customer of our Check Image Archive product that was not repeated in Q1 2005. We have made significant progress in reducing our SG&A costs and in Q1 2005 we ~~operate is healthy~~have not incurred any significant Restructuring and ~~the buying climate continues~~Other Charges. We also increased our investment in Research and Development in Q1 2005, as compared to ~~be favorable with the Check 21 law that took effect on October 28,~~Q1 2004, and the ~~need for banks to make investments~~net result of these factors increased our profitability in electronifying their check payment system. However, these conditions have also attracted competition for our GPT business segment, including point solution providers and large hardware and solution providers like IBM, Unisys and NCR who view Check 21 as an opportunity for incremental software and advisory services revenue.

Our Q2 2004 sales activity reflected this strong market demand with our GPT business segment having one of the strongest contract sales quarters to date for software and services; however, in Q3 2004 that trend did not continue as delays in decision making by customers and competitive losses contributed to the softness in contracted sales in Q3 2004. The outlook for Q4 2004 continues to remain very sensitive to the volume and timing of sales, product delivery, customer implementation schedules and customer-dependent timing on a small number of engagements in our RevE business segment. We expect total revenues for Q4 2004 to be flat to slightly down, and operating profit to be approximately break-even or slightly negative. During Q3 2003, we qualified an increased number of Check 21 and other potential sales opportunities, and anticipate that contract sales will improve in Q4 2004 and beyond as an expanded array of new products become available. Accordingly, we believe that this will result in revenue growth in 2005.

~~Although GPT had lower sales volume in Q3 2004, GPT segment revenue increased 17.5% to $21.4 million in Q3 2004,~~Q1 2005, as compared to ~~$18.2~~Q1 2004.

In Q1 2005, we generated $2.1 million ~~in Q2 2004; however, GPT segment revenue declined 5.2%, or~~of cash from operating activities and increased total cash by $1.2 million, as compared to ~~Q3 2003. The~~$9.7 million of cash generated from operating activities and a $2.9 million increase in ~~GPT segment revenue~~cash in Q3Q1 2004. Our cash flow remains positive and is heavily dependent on the timing of the collections of our December 31, 2004 maintenance renewals. Our continued improvements in cash collection led to more of these renewals being collected in Q4 2004, as compared to ~~Q2 2004,~~the prior year in which more of the December 31, 2003 maintenance renewal invoices were collected in Q1 2004.

Within our Revenue Enhancement (“RevE”) segment, we experienced a $765,000, or 9.0%, decline in revenues within our traditional RevE contingent consulting business; however, we experienced an increase of $383,000, or 67.3%, within our Customer Value Enhancement (“CVE”) software and proprietary sales management business. RevE consulting revenues were flat in the domestic market but declined $688,000, or 28.0%, in the international markets. The CVE increase was primarily the result of the ~~acceptance~~reformulation of ~~our new image exchange product, ExchgLink, by our bank development partner.~~the CVE business model to reflect term software license arrangements as opposed to traditional perpetual license arrangements. This ~~product acceptance was directly related to the recognition of approximately $1.9 million of license revenue and $921,000 of services revenues~~change in ~~Q3 2004.~~

On a year-to-date basis, GPT segment revenue declined $8.7 million, or 12.9%, to $58.8 million from $67.5 million, primarily as a result of weak license and related services contract sales in Q4 2003 and Q1 2004, primarily related to delays in technology investments by our customers. We believe some of these delays are due to the fact that we bundle our products to provide a better value for our customers. This bundling tends to extend the buying cycle; however, we believe it is in the best long-term interest of our customers and the Company.

~~In Q3 2004, our RevE segment revenue grew 1.3% on a quarter-over-quarter basis and 9.0% on a YTD basis. We continue to experience good demand in the RevE consulting business because banks continue~~strategy appears to be ~~challenged to grow, and/or maintain existing revenue streams, primarily by two major shifts~~gaining acceptance, and in November 2004 the ~~banking industry: (1) the shift from end-of-day paper payment services to electronic intra-day~~CVE group entered into a 6-year term license with a Top 15 U.S. bank that increased software, services and ~~(2) the value proposition shift from paper handling to risk mitigation/information services. Both of these shifts are intensified by the fact that Check 21,~~maintenance revenue beginning in Q1 2005. Additionally in Q1 2005, we entered into a ~~momentum builder~~contract with a large international bank for ~~both shifts, went into effect in October 2004. Within the RevE market, we do experience moderate competition. There are~~ a number of smaller competitors that have put downward pressure on our pricing; however, customers value our larger size and the quality of our consultants, which provide better assurance of a successfulsimilar multi-year engagement.

In Q3 2004, our GPC segment revenue grew 25.1% on a quarter-over-quarter basis and 19.1% on a YTD basis. Over the last eighteen months, we have been repositioning this business from a staff supplement focus to one of thought leadership where margins and growth potential are superior. While the path to profitability and significant growth has taken longer than originally anticipated, we consider this business to be an important part of our overall integrated solution offering. The two drivers that we believe will fuel this growth are: (1) Check 21 with all of the changes it requires and (2) our own technology, designed to facilitate our customers’ transition from paper to electronics. The customer decision making process with regard to adopting image technology can be costly and complex, which provides a good opportunity for our consulting business. The competition we face in GPC resembles that of GPT. We have both very large providers on one side and small single-service consultancies on the other. We believe we maintain a strong competitive position because of our long-time and hard-earned reputation of advising these banks on similar operations and technology changes.

In Q2 2004, we announced our first contract for Carretek, our 51% owned offshore business process outsourcing initiative. Presently, the revenue impact is minimal, however there are two drivers for growth: (1) Check 21 has accelerated the pressure on banks to reduce the cost of processing paper payments and (2) the availability of image technology that makes it possible to separate the information to be processed from the paper itself. As for competition, there are many offshoring vendors; however, we believe our model is unique as we bring payment knowledge and bank expertise, along with an experienced offshore partner and facilities.

Beginning in Q3 2003, we began to increase our research and development (“R&D”) spending to address new product offerings and existing product enhancements that will be required by our customers to address all of the significant changes brought about by Check 21 legislation, USA Patriot Act and Basel II. Through October 31, 2004,For Q1 2005, total ~~R&D spending (including amounts capitalized) has increased to $8.3~~GPT revenues declined $1.3 million, ~~in 2004,~~or 6.5%, as compared to ~~$5.7 million for~~Q1 2004. This decline was primarily the ~~same period~~result of a decline in ~~2003. We expect this trend to continue for the balance of 2004 as we continue to develop new products.~~

To help fund these investments in our products, we are continually trying to improve performance, quality and efficiency within our organization. We have focused on reducing selling, general and administrative expenses and improving the utilization of our technical staff and consultants. While we have managed to lower these expenses, the reductions have beensoftware revenue discussed above, partially offset by increases in ~~Directors~~maintenance and ~~Officers’ Insurance, professional fees for Sarbanes-Oxley compliance, employee benefits, and increased GPT business segment selling expenses.~~services revenue.

Our Global Payments Consulting (“GPC”) segment experienced a slight revenue decline of approximately $86,000, or 8.2%, in Q1 2005, as compared to Q1 2004. We continue to expand our sales focus in this segment as we reposition this business to focus on 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 ~~operating results have been negatively affected by several non-recurring items. The EPG litigation settlement~~revenues were minimal, however in late January 2005 we expanded the scope of ~~$1.7 million,~~our outsourcing engagement with this single customer to include an additional set of transaction processing functions and revenue increased to $257,000 in Q1 2005. 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 continue to focus on reducing general and administrative costs to help fund increasing sales and marketing costs in both GPT and GPC, along with ~~$462,000~~increasing research and development costs to enhance our existing product offerings and more importantly, develop new product offerings. The reductions within general and administrative were primarily related to cost savings from our new health care plan and provider, along with reductions within office services and facilities. Additionally in ~~litigation costs, were recorded in~~Q1 2005, Restructuring and Other Charges declined significantly as compared to Q1 2004. In Q2Q1 2004, ~~an additional $1.2~~we accrued $1.686 million ~~in litigation costs were incurred. These Q2 2004 litigation costs were offset by a $1.2 million change in~~ estimated ~~reserves~~settlement amount related to ~~a discontinued product. See~~ ~~Restructuring~~the EPG litigation and ~~Other Charges~~ ~~within Management’s Discussion and Analysis~~expensed approximately $462,000 of ~~Financial Condition and Results of Operations.~~related legal costs. This litigation was ultimately settled in June 2004 for $1.7 million.

Results of Operations

Comparison of Three Months Ended ~~October 31, 2004~~April 30, 2005 (“~~Q3 2004”~~Q1 2005”) to Three Months Ended ~~October 31, 2003 (“Q3 2003”) and Nine Months Ended October 31,~~April 30, 2004 (“~~YTD~~Q1 2004”~~) to Nine Months Ended October 31, 2003 (“YTD 2003”~~)

Revenues

Revenues by Segment ($ in thousands):

																			Three Months Ended April 30,				Variance
	Three Months Ended October 31,				Variance					Nine Months Ended October 31,				Variance					2005		2004		$			%
	2004		2003		$			%		2004		2003		$			%
Revenue Enhancement	$	7,987	$	7,886	$	101		1.3	%	$	27,510	$	25,243	$	2,267		9.0	%	$	8,999	$	9,481	$	(482	)	(5.1	)%
Global Payments Technologies	21,394		22,577		(1,183		)	(5.2	)	58,830		67,547		(8,717		)	(12.9	)	17,968		19,225		(1,257		)	(6.5	)
Global Payments Consulting	1,176		940		236			25.1		3,610		3,030		580			19.1		974		1,060		(86		)	(8.1	)
Corporate (Outsourcing) Revenue	50		—		50			—		60		—		60			—		257		—		257			—

Total Revenues	$	30,607	$	31,403	$	(796	)	(2.5	)%	$	90,010	$	95,820	$	(5,810	)	(6.1	)%	$	28,198	$	29,766	$	(1,568	)	(5.3	)%

The decline in revenue for ~~Q3 2004,~~Q1 2005, as compared to ~~Q3 2003,~~Q1 2004, was driven by ~~a 5.2% decline~~declines in ~~revenue within the GPT~~all three of our major business ~~segment,~~segments, offset by ~~a 1.3% increase in RevE~~increased revenue from Carretek LLC, our 51% owned business which provides payment and a 25.1% increase in revenue within our GPC business segment. The decline in revenue on a YTD basis was driven by a 12.9% decline within the GPT business segment, offset by 9.0% growth within the RevE business segment and a 19.1% increase in our GPC business segment.transaction processing outsourcing services.

The decline in our GPT business segment, on ~~both~~ a quarter-over-quarter basis, has been primarily the result of a decline in software revenue of $2.6 million, offset by a $283,000 increase in maintenance revenue and $1.0 million in services revenue. The decline in GPT software revenue is concentrated within the Payments product group. In Q1 2004, the Payments product group derived $2.9 million from a ~~YTD~~license sale to a single customer of our Check Image Archive product which was not repeated in Q1 2005.

The decline within our RevE business segment, on a quarter-over-quarter basis, was principally driven by a $765,000, or 9.0%, decline in traditional consulting revenues, offset by a $386,000, or 76.7%, increase in CVE software, maintenance and services revenue. The decline in RevE consulting revenue was primarily with non-U.S. customers, however this decline is a result of timing. RevE continues to expand its marketing effort internationally. In Q1 2005 there was only one non-U.S. revenue producing engagement, as opposed to three in Q1 2004. The increase in CVE software, maintenance and services revenue in Q1 2005 was primarily attributed to a reformulation of the sales strategy to position the CVE product as an enhancement to customers’ existing CRM solution, as opposed to a replacement of an existing CRM solution. Increased sales capacity also helped fuel this increased activity.

The decline in the GPC business segment revenue, on a quarter-over-quarter basis, was primarily the result of ~~weak software and related~~$57,000 of decreased services ~~contract sales~~within our Float group. With recent increases in ~~Q4 2003 and Q1 2004, primarily related~~interest rates, we expect to ~~delays in technology investments by our customers. We believe some of these delays are due to the fact that we bundle our products to provide a better value~~have future increased customer demand for our ~~customers. This bundling tends to extend the buying cycle, however we believe it is in the best long-term interest of~~Float product offerings. Additionally, with our ~~customers and the Company.~~

The increase within our RevE business segment, on both a quarter-over-quarter and YTD basis, was principally driven by a 16.1% increase in consulting revenues on a quarterly basis and a 24.7% increase on a YTD basis. The increase in consulting revenues on a quarterly basis was derived principally from a larger number of domestic engagements and the increase on a YTD basis was the result of increased international consulting revenue. These increases in consulting revenue were offset by a 80.3% decline in CVE software and services revenue on a quarterly basis and a 77.6% decline on a YTD basis. The steep declines within CVE were the result of a lack of sales leadership and capacity. Two new sales persons were hired in Q3 2004.

~~The increases in revenues in 2004 within our GPC business segment, on both a quarter-over-quarter and YTD basis, reflect the results of~~ expanded sales focus ~~in this segment as we repositioned this~~and the repositioning of the GPC consulting business to ~~focus on Check 21~~ enterprise-wide payment and risk strategies and image enablement planning and ~~integration.~~integration, we expect to be well positioned for revenue growth opportunities.

Overall, as we look across our three major business segments, we believe that we are well positioned and have a competitive advantage to capitalize on the significant changes brought about by ~~the~~factors affecting our customers including revenue pressures, technology and regulatory change (i.e., Check 21, ~~legislation,~~ USA Patriot Act and Basel IIII), growing costs and reputational risk associated with identity and transaction fraud. We anticipate revenue growth in 2005 due to ~~our subject matter expertise in the impacted areas. We anticipate that contract~~ sales ~~will improve in Q4 2004, and beyond, as an expanded array~~ of new products ~~become available. Accordingly, we believe this will result in revenue growth in 2005.~~and increased consulting opportunities. The Company continues to focus on cost management efforts to improve 2005 profitability and increase shareholder value. Revenue and operating income for the second quarter of 2005 are expected to improve over first quarter 2005 levels.

Consulting Fees ($ in thousands):

Three Months Ended October 31,

Variance

Nine Months Ended October 31,

Variance

2004

2003

$

%

2004

2003

$

%

Consulting Fees

$
7,930

$
6,396

$
1,534

24.0
%
$
27,501

$
21,349

$
6,152

28.8
%

	Three Months Ended April 30,				Variance
	2005		2004		$			%

Consulting Fees	$	8,318	$	9,057	$	(739	)	(8.2	)%

The majority of our consulting revenue is derived from our RevE business segment. Consulting revenue in the RevE segment ~~increased $1.0 million,~~decreased $765,000, or ~~16.1%~~9.0%, to ~~$7.1~~$7.7 million in ~~Q3 2004~~Q1 2005 from ~~$6.1~~$8.5 million in Q3 2003. Domestically, consulting revenue for RevE increased approximately $759,000 on a quarterly basis, and there were 14 revenue producing engagements in Q3 2004, as compared to 9 in Q3 2003. International RevE consulting revenue increased $357,000 in Q3 2004, as compared to Q3 2003. ~~Consulting revenue in the RevE segment increased $5.0 million, or 24.7%, to $25.0 million on a YTD basis from $20.0 million for the same period in 2003.~~Q1 2004. Domestically, consulting revenue for RevE was essentially flat at $6.0 million on a ~~YTD~~quarterly comparison basis, and there were 2012 domestic revenue producing engagements ~~on a YTD basis~~ in ~~2004 and 17~~Q1 2005, as compared to 10 in ~~2003.~~Q1 2004. International RevE consulting revenue ~~increased $5.1 million~~decreased $688,000 in ~~YTD 2004,~~Q1 2005, as compared to ~~YTD 2003. Additionally,~~Q1 2004, and there ~~were 4 international~~was only 1 non-U.S. revenue producing ~~engagements~~engagement in ~~YTD 2004,~~Q1 2005 as compared to 13 in ~~YTD 2003.~~Q1 2004.

Consulting revenue in our GPC segment increased 276.7%, to $789,000 in Q3 2004 from $210,000 in Q3 2003, and increased 88.4% to $2.2 million in YTD 2004 from $1.2 million in YTD 2003. We have seen increased momentum from our redefined GPC segment, and we continue to be cautiously optimistic about the future growth prospects of the GPC segment.was essentially flat at $500,000 on a quarterly basis.

Software License Fees ($ in thousands):

Three Months Ended October 31,

Variance

Nine Months Ended October 31,

Variance

2004

2003

$

%

2004

2003

$

%

Software License Fees

$
5,701

$
7,026

$
(1,325
)
(18.9
)%
$
16,134

$
21,955

$
5,821

(26.5
)%

	Three Months Ended April 30,				Variance
	2005		2004		$			%

Software License Fees	$	3,359	$	5,856	$	(2,497	)	(42.6	)%

The majority of our software license fees are derived from our GPT business segment. GPT software license revenue decreased ~~$674,000,~~$2.6 million, or ~~10.6%~~45.8%, to ~~$5.7~~$3.0 million in ~~Q3 2004~~Q1 2005 from ~~$6.4~~$5.6 million in ~~Q3 2003. GPT~~Q1 2004. This decline is primarily the result of a $2.9 million software license revenue declined $3.7 million, or 18.8%, to $15.9 million in YTD 2004 from $19.6 million in YTD 2003. The acceptance of our new image exchange product, ExchgLink, by our development partner was directly related to the recognition of approximately $1.9 million, or 32.8%, of the GPT software license fees in Q3 2004, and 11.7% on a YTD basis. Additionally, $3.4 million, or 21.3%, on a YTD 2004 basis of software license revenue in the GPT business segment ~~was the result of a license sale to~~generated from a single customer in our Check Image Archive ~~area,~~product group, which did not require implementation services. ~~In 2003,~~This decline is partially offset by $181,000 of Risk product revenue licensed, with a deferral of the related software license revenue, in previous fiscal years for which it was ~~more evenly distributed over our customer base.~~determined in Q1 2005 that no additional implementation services would be required by the Company.

~~Several new product initiatives were launched during the latter half of fiscal 2003 and continuing into fiscal 2004. These initiatives include:~~

•ExchgLink: an application designed to send and receive check images. This product has been installed at our development partner site, along with an additional beta site. The majority of the license revenues were recognized in Q3 2004.

•~~Source Capture: an application that enables customers to capture check images at corporate sites. License revenues are deferred since the product is not generally available.~~

•CORE Fraud Manager: our next generation fraud application which integrates multiple fraud detection and regulatory compliance functions into a single unified framework. License revenues are deferred since the product is not generally available.

•~~CORE Filter: an anti-money laundering application.~~

•~~Express Research: an image-enabled back office application.~~

The requirements for our software solution to support Check 21 were defined in 2003. Expanded requirements became visible in the first half of fiscal 2004. Likewise, the timing of the investment decisions by our bank customers became increasingly visible over the same time period.

The software revenue derived from our CVE product offering, contained in our RevE business segment, ~~declined~~increased to ~~$25,000~~$301,000 in ~~Q3 2004,~~Q1 2005, as compared to ~~$646,000~~$179,000 in ~~Q3 2003 and declined~~Q1 2004. This increase is the result of reformulating our sales strategy to ~~$217,000 in YTD 2004,~~position our CVE product as ~~compared~~an enhancement to ~~$2.4 million in YTD 2003. This decline resulted from~~an existing CRM customer installation, as opposed to a ~~lack of sales leadership and capacity. Two new~~replacement for an existing CRM customer installation. The CVE group has also added two additional sales persons ~~were hired~~ in Q3the latter half of fiscal 2004. In November 2004, the CVE group signed a multi-year contract to provide software, services and maintenance with a customer. While the impact on fiscal 2004 is expected to be minimal, this contract will positively impact fiscal 2005 and beyond.

Software Maintenance Fees ($ in thousands):

Three Months Ended October 31,

Variance

Nine Months Ended October 31,

Variance

2004

2003

$

%

2004

2003

$

%

Software Maintenance Fees

$
11,491

$
11,770

$
(279
)
(2.4
)%
$
32,807

$
34,764

$
(1,957
)
(5.6
)%

	Three Months Ended April 30,				Variance
	2005		2004		$		%

Software Maintenance Fees	$	11,312	$	11,084	$	228	2.1	%

The majority of our maintenance revenue is derived from our GPT business segment. Software maintenance fees are invoiced and collected 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 revenue is recognized 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. Maintenance contracts usually carry annual maintenance fee escalation clauses generally based on an index, such as the consumer price index. ~~Increases for~~Because of the revenue recognition policy, maintenance revenue ~~in 2004 due to this escalation were offset by the fact that one major customer gave notice of their intent to not renew their $2.5 million maintenance contract for fiscal 2004.~~can vary from quarter-to-quarter.

3430

Software Implementation Fees ($ in thousands):

Three Months Ended October 31,

Variance

Nine Months Ended October 31,

Variance

2004

2003

$

%

2004

2003

$

%

Software Implementation Fees

$
4,622

$
4,983

$
(361
)
(7.2
)%
$
11,143

$
14,385

$
(3,242
)
(22.5
)%

	Three Months Ended April 30,				Variance
	2005		2004		$		%

Software Implementation Fees	$	4,134	$	2,879	$	1,255	43.6	%

The majority of our software implementation fees are derived from our GPT business segment. Within GPT, software implementation fees were ~~$4.4~~$3.6 million in ~~both Q3 2004 and Q3 2003. YTD 2004, software implementation revenue within GPT declined $2.8 million, or 21.4%,~~Q1 2005, as compared to ~~$10.2 million from $13.0~~$2.6 million in ~~YTD 2003. This decline reflects the lower volume of both software license and software implementation sales contracts signed~~Q1 2004. The increase in ~~the latter half of 2003 and fiscal 2004. In Q3 2004, approximately $921,000, or 21.0%, of the GPT~~ software implementation fees ~~were directly~~is the result of increasing customization service engagements related to ~~the acceptance of our new image exchange~~existing customer software product ~~ExchgLink, by our bank development partner. In the majority of our customer arrangements, installation services are provided to the customer when a license is purchased.~~installations.

Outsourcing Service Fees ($ in thousands):

	Three Months Ended April 30,				Variance
	2005		2004		$		%

Outsourcing Service Fees	$	257	$	—	$	257	—	%

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 were minimal; however in late Q4 2004, we expanded our scope of business with our initial customer to include a second set of transaction processing functions, and in Q1 2005 we added a third set of transaction processing functions.

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

Three Months Ended October 31,

Variance

Nine Months Ended October 31,

Variance

2004

2003

$

%

2004

2003

$

%

Out-of-Pocket Expense Reimbursements

$
813

$
1,228

$
(415
)
(33.8
)%
$
2,365

$
3,367

$
(1,002
)
(29.8
)%

	Three Months Ended April 30,				Variance
	2005		2004		$			%

Out-of-Pocket Expense Reimbursements	$	818	$	890	$	(72	)	(8.1	)%

The decrease in these reimbursements ~~on both a quarter-over-quarter and YTD basis,~~ occurred within the ~~GPT~~RevE business segment, and corresponds with the decline in ~~software implementation~~International RevE consulting revenue noted above. Most of ~~the~~our software services and consulting engagements require our employees to be at the customer location for extended periods of time, which gives rise to out-of-pocket expense reimbursements.

3531

Cost of Revenues

Cost of Revenues by Segment ($ in thousands):

																							Three Months Ended April 30,						Variance
	Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance					2005			2004			$			%
	2004			2003			$			%		2004			2003			$			%
Revenue Enhancement	$	4,139		$	4,625		$	(486	)	(10.5	)%	$	13,114		$	14,136		$	(1,022	)	(7.2	)%	$	4,471		$	4,376		$	95		2.2	%
% of revenue	51.8		%	58.6		%						47.7		%	56.0		%						49.7		%	46.2		%

Global Payments Technologies	$	10,138		$	9,995		$	143		1.4	%	$	27,315		$	29,400		$	(2,085	)	(7.1	)%	$	8,143		$	8,518		$	(375	)	(4.4	)%
% of revenue	47.4		%	44.3		%						46.4		%	43.5		%						45.3		%	44.3		%

Global Payments Consulting	$	1,285		$	1,560		$	(275	)	(17.6	)%	$	3,971		$	5,040		$	(1,069	)	(21.2	)%	$	901		$	1,343		$	(442	)	(32.9	)%
% of revenue	109.3		%	166.0		%						110.0		%	166.3		%						92.5		%	126.7		%

Corporate (Outsourcing) Services	$	223		$	—		$	223		—	%	$	236		$	—		$	236		—	%
Corporate (Outsourcing Services)																							$	579		$	—		$	579		—	%
% of revenue	446.0		%	—		%						393.3		%	—		%						225.3		%	—		%

Total Cost of Revenues	$	15,785		$	16,180		$	(395	)	(2.4	)%	$	44,636		$	48,576		$	(3,940	)	(8.1	)%	$	14,094		$	14,237		$	(143	)	(1.0	)%
% of revenue	51.6		%	51.5		%						49.6		%	50.7		%						50.0		%	47.8		%

~~Costs of revenues in absolute dollars declined in both the RevE and GPC segments and increased in both the GPT and Corporate segments in Q3 2004, as compared to Q3 2003.~~ Cost of revenues in absolute dollars declined slightly to $14.1 million in ~~all three of our major business segments on a YTD basis.~~Q1 2005 from $14.2 million in Q1 2004. However, direct costs as a percentage of ~~revenues~~revenue increased ~~within the GPT business segment as~~ ~~declines~~to 50.0% in ~~software license, software maintenance and software implementation revenue were greater than the cost reductions.~~

~~Within GPT, cost of revenues increased slightly on a quarter-over-quarter basis.~~Q1 2005 from 47.8% in Q1 2004. This increase was primarily the result of ~~increased~~lower consulting revenue within our RevE business segment and lower software ~~amortization on the ExchgLink product. Approximately $380,000 of capitalized software was amortized and matched with the related~~ license revenue. On a YTD basis, the decline in cost of revenues is mainly attributable to the reduction in direct costs related to services. These declines represent some personnel reductions, as well as the redeployment of the services staff to Research and Development projects, software maintenance projects and sales support.revenue within our GPT business segment.

~~Similarly, within~~Within the RevE business segment, the ~~decline~~increase in the cost of revenues on a quarter-over-quarter basis was ~~related to~~ the ~~declines in the direct costs within the CVE software business; however, these declines were partially offset by smaller increases~~result of an approximate $120,000 increase in the cost of consulting ~~revenue. As with~~due primarily to $94,000 of royalties accrued for intellectual property to a third party related to one customer engagement in Q1 2005. Additionally, cost of services increased $69,000 in Q1 2005 due to increased CVE customer installation engagements in Q1 2005, as compared to Q1 2004. These two increases were partially offset by a $78,000 decline in costs of out-of-pocket expenses due to less international travel in Q1 2005, as compared to Q1 2004. Direct costs as a percentage of revenue increased to 49.7% in Q1 2005 from 46.2% due primarily to lower RevE consulting revenue in Q1 2005, as compared to Q1 2004.

Within the GPT ~~there have been~~business segment, the decrease in the cost of revenues on a quarter-over-quarter basis was primarily the result of a decline in the cost of services achieved through personnel reductions ~~within~~in the ~~CVE software business, as well~~last half of fiscal year 2004. Even with these cost reductions, direct costs as a ~~redeployment~~percentage of ~~staff~~GPT revenue increased due to ~~sales support.~~a $2.6 million decline in GPT software license revenue.

The direct cost reductions within GPC were attributable to personnel reductions ~~within their consulting practices~~performed during the latter half of fiscal 2004 to bring our costs in line with expected consulting revenues.

The direct cost increase related to Carretek, our 51% owned business which outsources payment and transaction processing, is related to the direct costs related to our single customer which began in Q2 2004.

Cost of Consulting ($ in thousands):

																							Three Months Ended April 30,						Variance
	Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance					2005			2004			$			%
	2004			2003			$			%		2004			2003			$			%
Cost of Consulting	$	4,555		$	4,936		$	(381	)	(7.7	)%	$	14,166		$	15,193		$	(1,027	)	(6.8	)%	$	4,241		$	4,529		$	(288	)	(6.4	)%
% of consulting revenue	57.4		%	77.2		%						51.5		%	71.2		%						51.0		%	50.0		%

The cost of consulting consists primarily of personnel costs related to our consulting engagements within our RevE and GPC segments. The ~~majority of the~~ decline in ~~the 2004 periods, as compared to the 2003 periods, is attributed~~cost of consulting on a quarter-over-quarter basis was primarily due to a ~~$241,000 decrease on a quarterly basis and a $998,000 decrease on a YTD basis~~$355,000 reduction within our GPC ~~segment. Personnel costs, along with contractor costs and travel, have been reduced~~business segment, achieved through personnel reductions made in the latter half of fiscal year 2004 to bring ~~them~~costs in line with expected ~~near-term~~GPC consulting revenues. The decreased expenses were partially offset by $117,000 increased cost of consulting within our RevE business segment, related primarily to $94,000 royalty expense to a third party for intellectual property for one customer.

Cost of Software Licenses ($ in thousands):

																					Three Months Ended April 30,						Variance
	Three Months Ended October 31,						Variance				Nine Months Ended October 31,						Variance				2005			2004			$			%
	2004			2003			$		%		2004			2003			$		%
Cost of Software Licenses	$	2,503		$	2,037		$	466	22.9	%	$	5,771		$	5,662		$	109	1.9	%	$	1,536		$	1,598		$	(62	)	(3.9	)%
% of software license revenue	43.9		%	29.0		%					35.8		%	25.8		%					45.7		%	27.3		%

The cost of software licenses consists primarily of amortization of capitalized and acquired software costs along with royalties payable to third parties. The ~~increase~~decrease in the cost of software license ~~fees~~revenue on a quarter-over-quarter basis is primarily the result of ~~increased capitalized~~lower royalty expense in Q1 2005, as compared to Q1 2004, relating to the decline in software ~~amortization related to our ExchgLink product. Approximately $380,000 of additional~~revenue over the same period. This decline in software ~~amortization was matched with the related revenues~~revenue also resulted in ~~Q3 2004. On~~ a ~~YTD basis, the~~sharp increase in ~~capitalized~~the cost of software ~~amortization is partially offset by lower~~license revenue as a percentage of software ~~royalty costs.~~license revenue.

In connection with software license and maintenance agreements entered into with certain banks and purchase agreements entered into with vendors under which we acquired software technology used in products sold to our customers, we are required to pay royalties on sales of certain software products. Under these arrangements, we accrue royalty expense when the associated revenue is recognized. The royalty percentages generally range from 20% to 50% of the associated revenue. In ~~Q3 2004,~~Q1 2005, we recorded ~~$685,000~~$92,000 of software royalty expense compared to ~~$718,000~~$179,000 of software royalty expense recorded in ~~Q3 2003. In YTD 2004, we recorded $1.4 million of royalty expense compared to $1.7 million for the YTD 2003.~~Q1 2004. Depending on our future product mix, our margins from software license fees may be negatively impacted by increased software royalty expense.

3733

Cost of Software Maintenance ($ in thousands):

																					Three Months Ended April 30,						Variance
	Three Months Ended October 31,						Variance				Nine Months Ended October 31,						Variance				2005			2004			$		%
	2004			2003			$		%		2004			2003			$		%
Cost of Software Maintenance	$	3,765		$	3,600		$	165	4.6	%	$	10,949		$	9,910		$	1,039	10.5	%	$	3,975		$	3,798		$	177	4.7	%
% of software maintenance revenue	32.8		%	30.6		%					33.4		%	28.5		%					35.1		%	34.3		%

Cost of software maintenance consists primarily of personnel and facility costs to provide telephone support, ~~products~~product defect support and other enhancements to our existing products, which are not significant enough to extend the product’s life cycle or substantially increase its marketability. The increase in ~~Q3 2004,~~Q1 2005 compared to ~~Q3 2003, and YTD~~Q1 2004 ~~as compared to YTD 2003,~~ occurred as a result of ~~increases in both~~an increased use of contract labor within our GPT business segment related to and ~~RevE business segments. This increase is personnel related and reflects~~reflecting an increased emphasis inon supporting and enhancing our current product mix. This increase was not attributable to additional overall headcount; rather, this cost increase represents a partial redeployment of our technical staff from the software services area to the maintenance area.

As discussed above, the annual maintenance fee is generally paid by the customer at the beginning of the maintenance period and revenue is recognized 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 the 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. As a result, our cost of software maintenance as a percentage of related maintenance revenue may fluctuate.

Cost of Software Implementation ($ in thousands):

																						Three Months Ended April 30,						Variance
	Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance				2005			2004			$			%
	2004			2003			$			%		2004			2003			$		%
Cost of Software Implementation	$	4,002		$	4,485		$	(483	)	(10.8	)%	$	11,181		$	14,398		$	3,217	22.3	%	$	2,973		$	3,369		$	(396	)	(11.8	)%
% of software implementation revenue	86.6		%	90.0		%						100.3		%	100.1		%					71.9		%	117.0		%

Costs of software implementation consist primarily of personnel and facility costs to provide software implementation and project management support to customer software implementations within our GPT business segment and the CVE software product within our RevE segment. The decline in costs of software implementation ~~for both~~reflect decreased personnel costs within our GPT business segment. These headcount reductions were performed in the ~~quarterly and YTD periods,~~latter half of fiscal 2004 to improve utilization. The sharp decline in the costs of software implementation, as a percentage of software implementation revenue, was the result of decreased costs within GPT along with an increased volume of active services engagements.

Cost of Outsourcing Service Fees ($ in thousands):

	Three Months Ended April 30,						Variance
	2005			2004			$		%

Cost of Outsourcing Service Fees	$	579		$	—		$	579	—	%
% of outsourcing services revenue	225.3		%	—		%

The increase in the cost of outsourcing service fees is due to the creation of Carretek, our 51% owned business outsourcer for payment and transaction processing. In Q2 2004, this business retained its first customer. We do not expect our direct costs, as a percentage of outsourcing service revenue, to decline in new software license and implementation projects, in both the GPT segment and the RevE segment. On a quarterly basis, the cost of service implementations declined $263,000 and $321,000 in the GPT and RevE segments, respectively. On a YTD basis, the cost of service implementations declined $2.3 million and $1.0 million in the GPT and RevE segments, respectively. These lower costs correspondwithout expanding this single customer to ~~the lower volume of active software implementation engagements in 2004, as compared to 2003.~~its full capacity or securing additional outsourcing customers.

3834

Out-of-Pocket Expenses ($ in thousands):

	Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance					Three Months Ended April 30,						Variance
	2004			2003			$			%		2004			2003			$			%		2005			2004			$			%
Cost of Out-of-Pocket Expenses	$	738		$	1,122		$	(384	)	(34.2	)%	$	2,333		$	3,413		$	(1,080	)	(31.6	)%

Out-of-Pocket Expenses																							$	790		$	943		$	(153	)	(16.2	)%
% of out-of-pocket expense reimbursements	90.8		%	91.4		%						98.6		%	101.4		%						96.6		%	106.0		%

These costs represent travel, meals and other sundry expenses incurred by our employees. These costs are invoiced to the customer, without mark-up, usually on a monthly basis. The absolute costs have declined on ~~both~~ a quarterly ~~and YTD~~ basis ~~in 2004,~~ due to fewer ~~software implementation engagements as discussed above.~~international RevE consulting engagements. In addition, certain customer contracts contain expense maximums, so in certain cases not all expenses incurred can be passed along to the ~~customer.~~customer without contractual revisions or the customer’s express written approval.

Operating Costs and Expenses:

Selling, General and Administrative Expenses ($ in thousands):

																							Three Months Ended April 30,						Variance
	Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance					2005			2004			$			%
	2004			2003			$			%		2004			2003			$			%
Selling, General and Administrative Expenses	$	11,320		$	11,797		$	(477	)	(4.0	)%	$	35,483		$	36,267		$	(784	)	(2.2	)%	$	10,904		$	12,192		$	(1,288	)	(10.6	)%
% of total revenue	37.0		%	37.6		%						39.4		%	37.8		%						38.7		%	41.0		%

Selling, general and administrative expenses generally consist of personnel costs such as salaries, commissions, incentive compensation and non-reimbursable travel. Additionally, the provision for doubtful accounts, insurance, including directors and officers insurance, as well as professional services such as legal and accounting expense and other related costs are classified within selling, general and administrative expense.

We ~~have experienced a decrease in these~~continue to focus on decreasing costs ~~on both a quarterly and YTD basis. While we have made progress in reducing~~throughout the organization. Some of the primary drivers of the decreased SG&A costs in ~~this area~~Q1 2005, as compared to Q1 2004, were as follows:

• Decreased corporate selling and marketing costs of $594,000; however, the individual business segments increased their selling and marketing costs by ~~reducing personnel~~$301,000. This transfer of costs was in response to a corporate initiative to shift the selling function from a corporate responsibility to a business segment responsibility.

• Decreased employee benefits of approximately $586,000, primarily related to decreased healthcare costs as we adopted a new healthcare plan and provider on January 1, 2005.

• Decreased office services and facility costs of $367,000, primarily related to decreased rent, telephone and equipment depreciation.

• Increased consolidation and efficiency within our ~~general~~executive and administrative areas, these reductions have been partially offset by increases in personnel expenses related to selling activities, especially within our GPT segment. Additionally, we have incurred increased non-personnel related expenses such as insurance costs for our directors and officers, increased employee benefit costs, increased costs related to Carretek LLC, and professional fees associated with our Sarbanes-Oxley compliance.corporate staff levels.

~~Additionally, because of the decline in delinquent accounts receivable balance, we have reduced our allowance for doubtful accounts by $275,000 in Q3 2004 and $667,000 on a YTD basis.~~

3935

Research and Development ($ in thousands):

																					Three Months Ended April 30,						Variance
	Three Months Ended October 31,						Variance				Nine Months Ended October 31,						Variance				2005			2004			$		%
	2004			2003			$		%		2004			2003			$		%
Research and Development Expenses	$	2,520		$	1,876		$	644	34.3	%	$	6,102		$	5,522		$	580	10.5	%	$	2,521		$	1,708		$	813	47.6	%
% of total revenue	8.2		%	6.0		%					6.8		%	5.8		%					8.9		%	5.7		%

Research and development expenses consist primarily of personnel, contract labor, travel and facilities expenses incurred by our research and development organization. ~~As anticipated in Q3 2004, research~~Research and development costs have increased on ~~both~~ a quarterly ~~and YTD~~ basis as a result of increased new product ~~development.~~development and less software costs capitalized in Q1 2005, as compared to Q1 2004. Research and development costs are typically limited to development of new software products, or enhancements to existing software products, which extend the product’s life cycle and/or substantially increase its marketability.

In accordance with SFAS No. 86, “Accounting for Costs of Computer Equipment to be Sold, Leased or Otherwise Marketed,” we capitalized ~~$593,000~~$437,000 in ~~Q3 2004,~~Q1 2005, as compared to ~~$204,000~~$910,000 in ~~Q3 2003. On a YTD basis,~~Q1 2004. In Q1 2005, we have begun to develop two new Cash solutions and the costs associated with these two products represented 88% of the amount capitalized ~~$2.2 million~~ in Q1 2005. In Q1 2004, ~~as compared to $204,000 in 2003. In 2004, $540,000~~100% of ~~our~~the capitalization iswas related to ~~our first version~~the development of Payments products, primarily ExchgLink, our product offering to send and receive check images. This product became generally available in Q3 2004. We have several other development initiatives underway in fiscal 2004 such as the second version of ExchgLink; Express Research, an image-enabled back office application;images, and Source Capture, an application which enables bank customers to capture check images at corporate sites; our next generation fraud application; an anti-money laundering application; and wire fraud. Considering these initiatives, we expect the total amount of research and development expense to increase slightly in Q4 2004.sites.

Software development costs of a product are capitalized from the time technological feasibility is reached until the general release of the product. We establish technological feasibility either through the process of creating a detailed program design and reviewing the detailed program design for any high risk development issues or the creation of a working model. Capitalization only occurs if we believe costs capitalized are recoverable through future sales of the software product under development.

Amortization of Intangible Assets:

Amortization of intangible assets was $350,000 for ~~Q3 2004~~Q1 2005 and ~~Q3 2003, and $1.1 million for YTD 2004 and YTD 2003.~~Q1 2004. The amortization results from the periodic recognition of amortization expense of intangible customer relationships acquired in the Check Solutions acquisition in 2001.

Restructuring and Other Charges: We recorded various restructuring and other charges and credits, as follows ($ in thousands):

	Workforce Reductions		EPG Litigation Settlement		Legal and Professional Fees		Other			Total

YTD 2004:
Quarterly period ended April 30, 2004	308		1,686		521		—			2.515
Total YTD 2004	$	308	$	1,686	$	521	$	—		$	2,515

YTD 2005:
Quarterly period ended April 30, 2005	127		—		—		(32		)	95
Total YTD 2005	$	127	$	—	$	—	$	(32	)	95

~~Quarter Ended April 30, 2003~~

We recorded ~~$545,000~~$127,000 in restructuring and other charges during the three month period ended April 30, ~~2003,~~2005, principally associated with the separation of ~~17 employees, within both~~6 employees. We also lowered our estimate by $32,000 for the Corporate and Global Payments Consulting (“GPC”) business segments. During the quarterly period ended April 30, 2003, we recorded a charge of $139,000 relating to legal and professional fees relating to our restatement efforts and the legal actions described in Note 8.

~~Quarter Ended July 31, 2003~~

~~We recorded $648,000 in restructuring and other charges during the three month period ended July 31, 2003, principally~~costs associated with the ~~separation~~discontinuance of ~~9 employees, within both the Corporate and GPC business segments. During the quarterly period ended July 31, 2003, we~~one of our software offerings, originally recorded ~~a charge of $130,000 relating to legal fees relating to the legal actions described~~ in ~~Note 8.~~January 2004.

~~Quarter Ended October 31, 2003~~

We recorded $170,000 in restructuring and other charges during the three month period ended October 31, 2003, principally associated with the separation of 3 employees, within the Corporate business segment. During the quarterly period ended October 31, 2003, we recorded a charge of $141,000 relating to legal fees relating to the legal actions described in Note 8.

Additionally, during the three months ended October 31, 2003, we reversed $421,000 primarily related to the true-up of termination benefits as actual costs were lower than estimated amounts. Additionally, $119,000 was reversed when estimated costs to close certain facilities were lower than our original estimates.

4136

~~Quarter Ended April 30, 2004~~

We recorded $308,000 in restructuring and other charges during the three month period ended April 30, 2004, principally associated with the separation of 10 employees. During the quarterly period ended April 30, 2004, the Company recorded a charge of $521,000 relating to legal and professional fees relating to our legal actions described in Note 8. Approximately $462,000 of the $521,000 of legal and professional fees were recorded as selling, general and administrative costs during the quarter ended April 30, 2004 and reclassified to restructuring and other charges in the quarter ended July 31, 2004.

~~The Company~~We expensed approximately $1.686 million for compensatory damages to EPG after the jury returned a verdict in favor of EPG on one claim and Carreker on three claims.

~~Quarter Ended July 31,~~ This litigation was ultimately settled in June 2004

for $1.7 million. We recorded $192,000 in restructuring and other charges during the three month period ended July 31, 2004, principally associated with the separation of 8 employees. During the quarter ended July 31, 2004, we recorded a charge of ~~$36,000~~$521,000 relating to legal and professional fees relating to ~~our shareholder~~these legal ~~actions described in Note 8.~~actions.

An additional $14,000 was expensed and the entire $1.7 million EPG settlement was paid to the plaintiff. Additionally, we recorded a charge for the litigation costs related to this legal action totaling $1.2 million.

We received a final payment of $455,000 from a customer in the settlement with one of our original CheckFlow Suite customers. This payment was recorded directly to this reserve. Concurrently, based on revised cost estimates, we lowered our estimate of the cost to develop and install any additional software, or software modifications, with these customers and reversed approximately $1.2 million of this reserve.

~~Quarter Ended October 31, 2004~~

We recorded $247,000 in restructuring and other charges during the three month period ended October 31, 2004, principally associated with the separation of 6 employees. During the quarter ended October 31, 2004, we recorded a charge of $20,000 relating to legal and professional fees relating to the Company’s shareholder legal actions described in Note 8.

The activity related to the accrued merger and restructuring costs during the three ~~and nine~~ months ended ~~October 31, 2004~~April 30, 2005 is as follows (in thousands):

	Workforce Reductions				Charges / Credits relating to CheckFlow Suite			Facility Closures		Other			Total			Workforce Reductions			Charges relating to CheckFlow Suite		Facility Closures			Other			Total
Balance at January 31, 2004	$		500		$	1,296		$	5	$	97		$	1,898

Balance at January 31, 2005																$	652		$	200	$	49		$	103		$	1,004

Additions to reserve balance:
Severance charges	308				—			—		—			308			127			—		—			—			127
Reductions to reserve balances:
Cash paid	(412			)	(29		)	—		(5		)	(446		)	(494		)	—		(44		)	—			(538		)
Balance at April 30, 2004	396				1,267			5		92			1,760

Additions to reserve balance:
Severance charges	192				—			—		—			192
Cash received from customer	—				455			—		—			455
Reductions to reserve balances:
Cash paid	(495			)	(149		)	—		(12		)	(656		)
Change in estimate	—				(1,215		)	—		—			(1,215		)	—			—		—			(32		)	(32		)
Balance at July 31, 2004	93				358			5		80			536

Additions to reserve balance:
Severance charges	247				—			—		—			247
Cash received from customer	—				—			—		46			46
Reductions to reserve balances:
Cash paid	(121			)	(91		)	—		(23		)	(235		)
Change in estimate	—				—			—		—			—
Balance at October 31, 2004	$	219			$	267		$	5	$	103		$	594

Balance at April 30, 2005																$	285		$	200	$	5		$	71		$	561

We anticipate the remaining reserve accruals at April 30, 2005 will be paid or remaining customer obligations completed within the next 12 months.

Other Income (Expense):

Interest Income ($ in thousands):

Three Months Ended October 31,

Variance

Nine Months Ended October 31,

Variance

2004

2003

$

%

2004

2003

$

%

Interest Income

$
92

$
69

$
23

33.3
%
$
207

$
223

$
(16
)
(7.2
)%

	Three Months Ended April 30,				Variance
	2005		2004		$		%

Interest Income	$	144	$	48	$	96	200.0	%

Interest income consists of interest earned on cash and cash equivalents. The increase quarter-over-quarter is primarily the result of higher average cash and cash equivalent balances ~~in Q3~~during Q1 2005, as compared to Q1 2004, and slightly higher yields on these investments.

Interest Expense ($ in thousands):

Three Months Ended October 31,

Variance

Nine Months Ended October 31,

Variance

2004

2003

$

%

2004

2003

$

%

Interest Expense

$
106

$
234

$
(128
)
(54.7
)%
$
336

$
991

$
(655
)
(66.1
)%

	Three Months Ended April 30,						Variance
	2005			2004			$			%

Interest Expense	$	(105	)	$	(108	)	$	(3	)	(2.8	)%

Interest expense is primarily the result of ~~borrowings under~~the commitment fees associated with the maintenance of our $30.0 million revolving credit agreement. Additionally, the amortization of the deferred loan costs are also included in interest expense. ~~The decline is attributable to less~~There were no borrowings outstanding ~~borrowings~~ under ~~the revolving~~this credit agreement ~~on both a quarterly and YTD basis~~ in ~~2004, as compared to 2003.~~Q1 2005 or Q1 2004.

Other income ($ in thousands):

																						Three Months Ended April 30,						Variance
	Three Months Ended October 31,						Variance					Nine Months Ended October 31,					Variance					2005			2004			$			%
	2004			2003			$			%		2004			2003		$			%
Gain on sale of Cash Services Australia Pty. Limited	$	—		$	—		$	—		—		$	539		$	—	539			—	%	$	—		$	539		$	(539	)	(100.0	)%
Equity in earnings of Cash Services Australia Pty. Limited	—			68			(68		)	—		(17		)	142		(159		)	(112.0	)%	—			(17		)	17			100.0
Minority share of net loss of Carretek LLC	234			—			234			—		454			—		454			—	%	318			86			232			269.8
Foreign exchange gains (losses)	43			161			(118		)	(73.3%	)	(245		)	114		(359		)	(314.9	)%
Foreign exchange losses																						(17		)	(129		)	112			86.8
Other	(2		)	(10		)	8			80.0	%	1			13		(12		)	(92.3	)%	5			5			—			—

Total	$	275		$	219		$	56		25.6	%	$	732		$	269	$	463		172.1	%	$	306		$	484		$	(178	)	(36.8	)%

In April 2004, we sold our 25% interest in Cash Services Australia Pty. Limited. The carrying value of our investment was approximately $383,000 and we received $922,000 in proceeds collected in May 2004. As a result of this transaction, we recorded a $539,000 gain.

~~During Q2 2003, we formed~~We own a 51% interest in Carretek LLC (“Carretek”), inthrough which ~~the Company owns a 51% interest, to~~we offer financial institutions off-shore centric outsourcing of their business processes. ~~To date,~~ Carretek has generated ~~minimal revenue~~approximately $647,000 and ~~has incurred approximately $926,000~~$174,000 in losses for the ~~nine~~three months ended ~~October 31, 2004.~~April 30, 2005 and April 30, 2004, respectively. Accordingly, the 49% share ~~or $234,000 on a quarterly basis and $454,000 on a YTD basis of~~relating to the minority interest in this loss, or $318,000 and $86,000 on a quarterly basis, was recorded in other income ~~(expense.)~~

(expense).

Provision for Income Taxes:

The Company has established a valuation allowance to reserve its net deferred tax assets at ~~October 31, 2004~~April 30, 2005 because the more likely than not criteria for future realization of the Company’s net deferred tax assets specified in ~~Statements~~Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” (“SFAS No. 109”) were not met.

The net tax provision was ~~$114,000 and $464,000~~$81,000 for the three ~~and nine~~ months ended ~~October 31, 2004, respectively,~~April 30, 2005 and consists of a provision for foreign taxes. ~~The net~~No U.S. Federal tax ~~provision of $146,000 and $372,000 for~~expense was recorded in the three ~~and nine~~ months ended ~~October 31, 2003, respectively, consists~~April 30, 2005, due to the availability of ~~a provision for foreign and state taxes.~~net operating losses from prior years. No U.S. Federal income tax benefit was recorded at ~~October 31,~~April 30, 2004 due to the uncertainty regarding the Company’s ability to generate taxable income, and resulting uncertainty relative to the recoverability of deferred tax assets.

In May 2004, the federal tax law changed to allow software license revenue to be deferred for tax purposes similar to the percent-complete revenue recognition model we use for financial statement purposes. The impact of this change in the tax law increased the amount of the net operating loss carryforwards by $8.6 million and thereby further ~~reduce~~reduced our effective tax rate at such time as we begin to generate taxable income.

Liquidity and Capital Resources

Historically, we have funded our operations and cash expenditures primarily with cash generated from operating activities. At ~~October 31, 2004 and January 31, 2004,~~April 30, 2005, we had working capital of ~~$11.7 million.~~$14.3 million compared to $12.3 million at January 31, 2005. We had ~~$26.8~~$35.7 million in cash and cash equivalents at ~~October 31, 2004, a decrease~~April 30, 2005, an increase of ~~$1.8~~$1.2 million from ~~$28.6~~$34.5 million in cash and cash equivalents at January 31, ~~2004.~~2005. At ~~October 31, 2004, we had no long-term debt compared to $6.3 million at~~April 30, 2005 and January 31, ~~2004.~~2005, we did not have any borrowings outstanding under our revolving line of credit. We expect that existing cash and cash generated from operating activities will be sufficient to meet our presently anticipated requirements for the foreseeable future.

Cash used in operating activities was $209,000 in the three months ended October 31, 2004 compared to cash used in operating activities of $4.8 million in the three months ended October 31, 2003. This improvement is primarily related to reductions in accounts receivable balances. Cash provided by operating activities was ~~$7.3 million in~~$2.1 for the ~~nine~~three months ended ~~October 31, 2004,~~April 30, 2005 compared to cash provided by operating activities of ~~$9.2~~$9.8 million in the ~~nine~~three months ended ~~October 31, 2003. Operating cash flows decreased as a~~April 30, 2004. This decline was primarily the result of the ~~EPG litigation settlement~~timing of ~~$1.7 million and related legal costs~~the collection of ~~$1.6 million paid out primarily in~~calendar year maintenance billings for the ~~first half~~calendar renewal of ~~fiscal 2004.~~January 1, 2005 through December 31, 2005, as compared to the prior year.

Average days’ sales outstanding fluctuate for a variety of reasons, including the timing of billings specified by contractual agreement, and receivables for expense reimbursements. The following table contains the quarterly days’ sales outstanding (DSO):

Quarter ended		DSO
April 30, 2005		35
January 31, 2005		35
October 31, 2004		35
July 31, 2004		46
April 30, 2004		46
~~January 31, 2004~~		59
~~October 31, 2003~~		56

Cash used in investing activities ~~during the three months ended October 31, 2004 was $1.9 million compared to $2.0~~remained flat at $1.1 million during the three months ended October 31, 2003. Cash used in investing activities during the nine months ended October 31, 2004 was $4.9 million, compared to $2.6 million during the nine months ended October 31, 2003. In the threeApril 30, 2005 and ~~nine months ended October 31, 2004, increased investments in capital~~2004. Capital expenditures of $698,000 were made ~~especially for a project to replace certain development hardware and software within our technology group~~ in ~~Charlotte, NC. Additionally, increased software development led to additional software costs being capitalized. In~~ the three months ended ~~October 31, 2003, an investment was~~April 30, 2005, as compared to $231,000 for the three months ended April 30, 2004. These investments were made for routine purchases of computer hardware and software, along with new computer security software for our network infrastructure. Additionally, the amount of capitalized software declined to ~~purchase an anti-money laundering software product~~$437,000 in the three months ended April 30, 2005, as compared to $910,000 for ~~$1.5 million.~~the three months ended April 30, 2004.

Financing activities provided cash of ~~$486,000~~$254,000 in the three months ended ~~October 31, 2004,~~April 30, 2005, and ~~provided~~used cash of ~~$482,000~~$5.7 million in the three months ended ~~October 31, 2003 and consisted~~April 30, 2004. Through April 30, 2005, we purchased $349,000 of ~~proceeds from~~our common stock ~~option exercises and receipts related~~under a program to ~~the minority interest and shareholder loan associated with Carretek LLC.~~ ~~The cash used in financing activities in the nine months ended October 31, 2004 was $4.2~~purchase up to $5.0 million ~~and the cash used in financing activities in the nine months ended October 31, 2003 was $12.5 million. The cash used~~ during the ~~nine months ended~~period April 18, 2005 through October ~~31, 2004 was primarily a $6.3 million debt payment,~~14, 2005. These treasury stock purchases were offset by ~~$1.6 million~~$52,000 of proceeds from the exercise of stock options and ~~$432,000 received~~a $551,000 minority shareholder cash advance to Carretek LLC. At April 30, 2004, we made a $6.3 million debt payment, which was offset by $375,000 of proceeds related to the exercise of stock options and $147,000 minority ~~interest and~~ shareholder ~~loan associated with~~cash advance to Carretek LLC. The cash used during the nine months ended October 31, 2003 included a $12.5 million debt payment and the $456,000 of deferred loan costs to amend our revolving credit agreement completed in July 2003, along with $384,000 of proceeds from stock option exercises and $98,000 of receipts related to the minority interest and shareholder loan associated with Carretek LLC.

We are a party to a revolving credit agreement with a group of banks providing for a commitment amount of $30.0 million and a maturity date of July 31, 2006. At ~~October 31,~~April 30, 2005 and April 30, 2004, the Company did not have any borrowings outstanding. ~~At October 31, 2003, we had outstanding borrowings of $12.5 million under the credit agreement.~~ Borrowings under the credit agreement currently bear interest equal to either the greater of prime or federal funds rate plus a margin ranging from 1.25% to 2.25% depending on our ratio of funded debt to Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”); or London Interbank Offered Rate (“LIBOR”) plus a margin equal to 2.75% to 3.75% depending on our ratio of funded debt to EBITDA. Interest payments are due quarterly. We are required to pay a commitment fee equal to 0.50% on the unused amount of the revolving credit agreement. The revolving credit agreement contains customary affirmative and negative covenants, some of which have been amended, including financial covenants requiring the maintenance of specified interest coverage, ratio of EBITDA to funded debt, and ratio of 80% of accounts receivable, cash and short-term investments to funded debt. Additionally, the payment of dividends is precluded subject to the approval of the banks. Substantially all of our assets collateralize this revolving credit agreement. As of ~~October 31, 2004,~~April 30, 2005, we are in compliance with the covenants of the revolving credit agreement, as amended.

The following summarizes our contractual obligations at ~~October 31, 2004~~April 30, 2005 and the effect these contractual obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

Payments Due by Period

Total

1 Year
or Less

Years 2-3

Years 4-5

After
5 Years

Operating leases

$
16,552

$
3,715

$
6,349

$
5,155

$
1,333

	Payments Due by Period
	Total		1 Year or Less		Years 2-3		Years 4-5		After 5 Years

Operating leases	$	14,615	$	3,571	$	5,967	$	4,788	$	289

We believe that current cash balances and expected future cash flows will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and other activities during fiscal ~~2004.~~2005. However, if current sources are not sufficient to meet our needs, we may seek additional equity or debt financing. There can be no assurance that additional financing would be available on acceptable terms, if at all. We are presently involved in a number of lawsuits. While we do not expect any negative outcomes, the final resolutions of the lawsuits are unknown, and could include judgments against us, or settlements that could require additional substantial payments by us. See Note 8 in our Notes to Condensed Consolidated Unaudited Financial Statements. The timing of the final resolution of these matters is uncertain. We believe that a material adverse outcome or outcomes with respect to the lawsuits could have a material adverse effect on our financial results, our business or our management including but not limited to, significantly impacting our liquidity in a negative manner as well as causing covenant violations under our revolving credit agreement, possibly resulting in a default thereunder. Further, we may in the future pursue acquisitions of businesses, products or technologies that could complement or expand our business and product offerings, and could change our financing needs. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward looking statement that involves risks and uncertainties, and actual results could vary. The failure to secure additional financing when needed could have a material adverse effect on our business, financial condition and results of operations.

Critical Accounting Policies

In preparing our ~~condensed~~ consolidated financial statements in conformity with accounting principles generally accepted in the United States, we use certain estimates and assumptions that affect the reported amounts and related disclosures and our estimates may vary from actual results. We consider the following seven accounting policies the most important to the portrayal of our financial condition and those that require the most subjective judgment. Although we believe that our estimates and assumptions are reasonable, actual results may differ, and such differences could be significant to our financial results.

Revenue Recognition

Our revenue recognition policies are in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions,” and Staff Accounting Bulletin (“SAB”) No. ~~101,~~104, “Revenue Recognition, ~~in Financial Statements,~~” ~~SAB No. 104,Revenue Recognition~~ and Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables.” In the case of software arrangements that require significant production, modification, or customization of software, or the license agreement requires us to provide implementation services that are determined to be essential to other elements of the arrangement, we follow the guidance in SOP 81-1, “Accounting for Performance of Construction —– Type and Certain Production —– Type Contracts.”

Consulting Fees. We employ three primary pricing methods in connection with our delivery of consulting services. First, we may price our delivery of consulting services on the basis of time and materials, in which case the customer is charged agreed-upon daily rates for services performed and out-of-pocket expenses. In this case, we are generally paid fees and related amounts usually on a monthly basis, and we recognize revenues as the services are performed. Second, we may deliver consulting services on a fixed-price basis. In this case, we are generally paid on a monthly basis or pursuant to an agreed upon payment schedule, and we recognize revenues on a ~~percentage-of-completion~~proportionate performance basis. We believe that this method is appropriate because of our ability to determine performance milestones and determine dependable estimates of our costs applicable to each phase of a contract. Because financial reporting of these contracts depends on estimates, which are assessed continually during the term of the contract, costs are subject to revisions as the contract progresses. Anticipated losses on fixed-priced contracts are recognized when estimable. Third, we may deliver consulting services pursuant to a value-priced contract with the customer. In this case, we are paid, on an agreed upon basis with the customer, either a specified percentage of (1) the projected increased revenues and/or decreased costs that are expected to be derived by the customer generally over a period of up to twelve months following implementation of our solution or (2) the actual increased revenues and/or decreased costs experienced by the customer generally over a period of up to twelve months following implementation of our solution, subject in either case to a maximum, if any is agreed to, on the total amount of payments to be made to us. We must first commit time and resources to develop projections associated with value-pricing contracts before a bank will commit to purchase our solutions, and we therefore assume the risk of making these commitments with no assurance that the customer will purchase the solution. Costs associated with these value-pricing contracts are expensed as incurred. These contracts typically include payments to be made to us pursuant to an agreed upon schedule ranging from one to twelve months in length. We recognize revenues generated from consulting services in connection with value-priced contracts based upon projected results only upon completion of all services and agreement upon the actual fee to be paid (even though billings for these services may be delayed by mutual agreement for periods not to exceed twelve months). In an effort to allow customers to more closely match expected benefits from our services with payments to us, we may on occasion, offer payment terms which

extend beyond 12 months. When we enter into an agreement that has a significant component of the total amount payable under the agreement due beyond 12 months or if it is determined payments are not fixed and determinable at the date the agreement is entered into, revenue under the arrangement will be recognized as payments become due and payable. When fees are to be paid based on a percentage of actual revenues and/or savings to our customers, we recognize revenues only upon completion of all services and as the amounts of actual revenues or savings are confirmed by the customer with a fixed payment date.

Costs associated with time and materials, fixed-priced and value-priced consulting fee arrangements are expensed as incurred and are included as a component of the cost of consulting fees.

We expect that value-priced contracts will continue to account for a significant portion of our revenues in the future. As a consequence of the use of value-priced contracts and due to the revenue recognition policy associated with those contracts, our results of operations will likely fluctuate significantly from period to period.

Regardless of the pricing method employed by us in a given contract, we are typically reimbursed on a monthly basis for out-of-pocket expenses incurred on behalf of our customers.

Software License Fees. A software license is sold either together with implementation services or on a stand-alone basis. We are usually paid software license fees in one or more installments, as provided in the customer’s contract but not to exceed 12 months. We recognize software license revenue upon execution of a contract and delivery of the software, provided that the license fee is fixed and determinable, no significant production, modification or customization of the software is required and collection is considered probable by management. When the software license arrangement requires us to provide implementation services that are essential to the functionality of the software or significant production, customization or modification of the software is required, both the product license revenue and implementation fees are recognized as services are performed.

In certain instances, especially with recently developed software, we defer software license revenue recognition until the earlier of the product being determined to be generally available and subject to revenue recognition or when the services are completed and the project is accepted by the customer. This practice is followed for the first two installations of a recently developed software product. After two successful implementations, the product is considered generally available (“GA”).

Software licenses are often sold as part of a multiple element arrangement that may include maintenance, implementation or consulting. We determine whether there is vendor specific objective evidence of fair value (“VSOEFV”) for each element identified in the arrangement to determine whether the total arrangement fees can be allocated to each element. If VSOEFV exists for each element, the total arrangement fee is allocated based on the relative fair value of each element. In cases where there is not VSOEFV for each element, or if it is determined services are essential to the functionality of the software being delivered, or if significant production, modification or customization of the software is required, we initially defer revenue recognition of the software license fees until VSOEFV is established or the services are performed. However, if VSOEFV is determinable for all of the undelivered elements, and assuming the undelivered elements are not essential to the delivered elements, we will defer recognition of the full fair value related to the undelivered elements and recognize the remaining portion of the arrangement value through application of the residual method. Where VSOEFV has not been established for certain undelivered elements, revenue for all elements is deferred until those elements have been delivered or their fair values have been determined. Evidence of VSOEFV is determined for software products based on actual sales prices for the product sold to a similar class of customer and based on pricing strategies set forth in our price book. Evidence of VSOEFV for services (installation, implementation and consulting) is based upon standard billing rates and the estimated level of effort for individuals expected to perform the related services. We establish VSOEFV for maintenance agreements using the percentage method such that VSOEFV for maintenance is a percentage of the license fee charged annually for specific software product, which in most instances is 20% of the portion of arrangement fees allocated to the software license element.

Although substantially all of our current software licenses provide for a fixed-price license fee, some licenses provide for the customer to pay a monthly license fee based on the actual use of the software product. The level of license fees earned by us under this arrangement will vary based on the actual amount of use by the customer. Revenue under these arrangements is recognized on a monthly basis as the usage becomes determinable.

Software Maintenance Fees. In connection with our sale of a software license, a customer may elect to purchase software maintenance services. Most of the customers that purchase software licenses from us also purchase software maintenance services, which typically are renewed annually. We charge an annual maintenance fee, which is typically a percentage of the initial software license fee. The annual maintenance fee generally is paid to us at the beginning of the maintenance period, and we recognize these revenues 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. We normally continue to provide maintenance service while awaiting payment from customers. When the payment is received, revenue is recognized for the period that revenue was previously deferred. This may result in volatility in software maintenance revenue from period-to-period.

Software Implementation Fees. In connection with the sale of a software license, a customer may elect to purchase software implementation services, including software enhancements and other software services. Most of the customers that purchase software licenses from us also purchase software implementation services. We price our implementation services on a time-and-material or on a fixed-price basis, and we recognize the related revenues as services are performed. Costs associated with these engagements are expensed as incurred.

Our contracts typically do not include right of return clauses, and as a result, we do not record a provision for returns.

Royalties

In connection with software license and maintenance agreements entered into with certain banks and purchase agreements with vendors under which we acquired software technology used in products sold to ~~its~~our customers, we are required to pay royalties on sales of certain software products. Under these arrangements, we accrue royalty expense when the associated revenue is recognized. For current product offerings, the royalty percentages generally range from 20%-50% of the associated revenues. Royalty expense is included as a component of the cost of software license fees and cost of software maintenance fees in the accompanying condensed consolidated ~~statement~~statements of operations.

Allowance for Doubtful Accounts

A large proportion of our revenues and receivables are attributable to our customers in the banking industry. Our trade accounts receivable balance is recorded net of allowances for amounts not expected to be collected from our customers. Because our accounts receivable are typically unsecured, we periodically evaluate the collectibility of our accounts based on a combination of factors, including a particular customer’s ability to pay as well as the age of receivables. In cases where the evidence suggests a customer may not be able to satisfy its obligation to us or if the collection of the receivable becomes doubtful due to a dispute that arises subsequent to the delivery of our products and services, we set up a specific reserve in an amount we determine appropriate for the perceived risk. If circumstances change, such as higher than expected defaults or an unexpected material adverse change in a customer’s ability to meet their financial obligations to us, our estimates of recoverability of amounts due us could be reduced by a material amount.

Software Costs Capitalized, Acquired Developed Technology, Goodwill, Other Intangible Assets and Other Long-Lived Assets

Software costs capitalized include developed technology acquired in acquisitions and costs incurred by us in developing our products that qualify for capitalization. We capitalize our software development costs, other than costs for internal-use software, in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (“SFAS 86”). Our policy is to capitalize software development costs incurred in developing a product once technological feasibility of the product has been established. Software development costs capitalized also include amounts paid for purchased software on products that have reached technological feasibility. Technological feasibility of the product is determined after completion of a detailed program design and a determination has been made that any uncertainties related to high-risk development issues have been resolved. If the process of developing the product does not include a detailed program design, technological feasibility is determined only after completion of a working model. All capitalized software development costs are amortized using an amount determined as the greater of: (1) the ratio that current gross revenues for a capitalized software project bears to the total of current and future projected gross revenues for that project or (2) the straight-line method over the estimated remaining economic life of the product (generally three to six years). We continually monitor the net realizable value of the software capitalized and acquired developed technology for factors that would indicate impairment, such as a decline in the demand or loss of a significant customer. During the quarterly period ended January 31, 2005, we performed our annual formal evaluation for impairment and determined that the carrying amount of these assets was not impaired and have noted no subsequent factors that would indicate impairment.

Goodwill ~~and intangibles with indefinite lives are~~is assessed on an annual basis for impairment at the reporting unit level by applying a fair value based test. We performed the initial impairment test of goodwill ~~and intangibles with indefinite lives assets~~ at February 1, 2002 and a follow up test at November 1, 2002 to determine if an impairment charge should be recognized under SFAS 142. The initial impairment analysis did not result in any write-down of capitalized costs. We perform an annual impairment assessment on November 1^st of each year or when factors indicate that other long-lived assets should be evaluated for possible impairment. We use an estimate of undiscounted future net cash flows over the remaining life of the asset to determine if impairment has occurred. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent from other asset groups. An impairment in the carrying value of an asset is assessed when the undiscounted, expected future operating cash flows derived from the asset are less than its carrying value. Management believes that assumptions used to determine cash flows are reasonable, but actual future cash flows may differ from those estimated. If we determine an asset has been impaired, the impairment is recorded based on the estimated fair value of the impaired asset. During the ~~fourth quarter of the year~~quarterly period ended January 31, ~~2004,~~2005, we performed our annual evaluation for goodwill impairment and determined that the carrying amount of goodwill was not impaired and have not noted any factors subsequent that would indicate impairment. Goodwill at ~~October 31, 2004~~April 30, 2005 totaled $20.8 million. Any deterioration in market conditions, increases in interest rates and changes in our projections with respect to the Global Payments Technologies reporting unit to which goodwill is allocated would result in additional impairment charges in the future.

Restructuring and Other Charges

During fiscal year 2001, we recorded reserves in connection with our acquisition of Check Solutions and subsequent operational restructurings. Additional reserves were recorded during each of the succeeding fiscal ~~2002, 2003 and the first three quarters of 2004.~~years. These reserves contain significant estimates pertaining to work force reductions, and the settlement of contractual obligations resulting from our actions. In ~~Q2 2004,~~the quarterly period ended April 30, 2005, we revised our estimate to ~~complete~~reflect our remaining costs related to ~~develop and install any additional~~the discontinuance of one of our software ~~or software modifications, with two customers~~offerings originally recorded in January 2004 and reversed ~~approximately $1.2 million of our reserve.~~$32,000. Although we do not anticipate any significant changes in the future, the actual costs may differ from these estimates.

Contingencies

We are subject to proceedings, lawsuits and other claims. We are required to assess the likelihood of any adverse judgments of outcomes to these matters as well as potential ranges of probable losses. A determination of the amount or reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in insurance coverage or approach such as change in settlement strategy.

Income Taxes

We recognize deferred tax assets or liabilities for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences. As a result of our cumulative net losses we have provided a full valuation allowance against our net deferred tax assets. In addition, we expect to provide a full valuation allowance of any future tax benefits until we can sustain a level of profitability that demonstrates our ability to utilize these assets.

Recently Issued Accounting Standards

See “Recently Issued Accounting Standards” in Note 2 of the ~~Condensed~~Notes to Consolidated ~~Unaudited~~ Financial Statements.

Item 33. . Quantitative and Qualitative Disclosures ~~About~~about Market Risk

Interest Rate Risk

We invest our cash in a variety of financial instruments. ~~These~~The vast majority of these investments are denominated in U.S. dollars and maintained with nationally recognized financial institutions.

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if forced to sell securities which have seen a decline in market value due to changes in interest rates. ~~Our investment securities are held for purposes other than trading.~~ At ~~October 31, 2004,~~April 30, 2005, we did not hold any fixed-rate investments.

We had no outstanding borrowings under our revolving credit agreement at ~~October 31, 2004.~~April 30, 2005. As described in Note 4 of our Notes to ~~Condensed~~ Consolidated ~~Unaudited~~ Financial Statements, the interest rate under the revolving credit agreement is variable.

Foreign Currency Risk

We currently have sales and marketing operations in several international locations including Canada, United Kingdom, South Africa and Australia. As a result, we have assets and liabilities outside the United States that are subject to fluctuations in foreign currency exchange rates. Due to the nature of these operations, we currently utilize the U.S. Dollar as the functional currency for all international operations. Within Carretek LLC, our 51% owned subsidiary which offers financial institutions offshore-centric outsourcing of their business processes, the majority of the labor costs is denominated in Indian Rupees while the revenues from this operation are denominated in U.S. Dollars. As our operations increase, fluctuating labor costs may increase our foreign currency risk.

An insignificant portion of our accounts receivable balance at ~~October 31, 2004~~April 30, 2005, was denominated in a foreign currency. Our exposure to adverse movements in foreign exchange rates is typically not significant. Therefore, we do not currently hedge our foreign currency exposure; however, we do try to limit our foreign currency exposure by negotiating these foreign contracts in U.S. Dollars. However, in the future we may change this practice. We will continue to evaluate the need to adopt a hedge strategy in the future and may implement a formal strategy if our business transacted in foreign currencies increases.

Foreign exchange ~~gains and~~ losses were ~~a $43,000 gain~~$17,000 and ~~a $161,000 gain for~~$129,000 in the three months ended ~~October 31,~~April 30, 2005 and 2004, ~~and 2003, respectively, and a $245,000 loss and a $114,000 gain for the nine months ended October 31, 2004 and 2003,~~ respectively.

5144

Item 4.4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file ~~with~~under the ~~SEC,~~Securities Exchange Act of 1934 (“Exchange Act”), and to process, summarize and disclose this information within the time periods specified in the rules ofunder the ~~SEC.~~Exchange Act.

Our management, under the supervision and with the participation of our Chief Executive and Chief Financial Officers, is responsible for evaluating the effectiveness of our disclosure controls and ~~procedures.~~procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). As of ~~October 31, 2004,~~April 30, 2005, they carried out an evaluation of our disclosure controls and procedures, and the Chief Executive and Chief Financial Officers believe that these disclosurecontrols and procedures are effective to ensure that we are able to collect, process and disclose the information we are required to disclose in the reports we file with the SEC within the required time periods.

In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal ~~Controls~~Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

5245

PART II:II: OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

Except as noted below, ~~the information contained in Part II, Item 1, Legal Proceedings in our Form 10-Q for the period ended July 31, 2004 and~~ the information contained in Part I, Item 3. Legal Proceedings in our Form 10-K for the period ended January 31, ~~2004~~2005 is hereby incorporated by reference.

The Company and individual defendants deny the allegations in the complaints referenced in the information incorporated herein by reference and intend to defend themselves vigorously. It is not possible at this time to predict whether we will incur any liability or to estimate the damages, or the range of damages, if any, that we might incur in connection with such lawsuits. The ultimate resolution of such lawsuits could have a material adverse effect on our business, results of operations, financial condition and cash flows.

On ~~September~~April 16, 2004, the Court of Chancery of the State of Delaware in and for New Castle County, by stipulation of all of the parties, dismissed the shareholders’ derivative action brought by Barbara I. Smith for the benefit of Nominal Defendant Carreker Corporation against 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, Ronald Antinori and Ernst & Young. As a result of this agreed upon dismissal, the derivative claims brought by Barbara I. Smith against the Company and the named current and former officers and directors are to be litigated in Civil Action No. 303CV1211-D in2003 the United States District Court for the Northern District of Texas, Dallas Division, issued an order consolidating a number of purported class action lawsuits into a Consolidated Action styled In re Carreker Corporation Securities Litigation, Civil Action No. 303CV0250-M. On October 14, 2003 the plaintiffs filed their Consolidated Class Action Complaint. The complaint, filed on behalf of purchasers of the Company’s common stock between May 20, 1998 and December 10, 2002, inclusive, alleged 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, and violation of Section 20A of the Securities Exchange Act against defendants John D. Carreker, Jr. and Ronald Antinori. The complaint also alleges, among other things, that defendants artificially inflated the value of Carreker 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 ~~was reinstated~~to file an amended complaint. Also the Court dismissed, with prejudice, all claims by shareholders prior to July 31, 1999.

On May 31, 2005, the plaintiffs filed an Amended Consolidated Class Action Complaint on ~~June 15, 2004, as reported~~behalf of purchasers of the Company’s common stock between July 30, 1999 and December 10, 2002, inclusive, which reiterates the allegations in the ~~Company’s Quarterly report on Form 10-Q for~~first complaint, and alleges violations of Section 10(b) of the ~~period ended July 31, 2004.~~Securities Exchange Act of 1934 and Rule 10b-5 against all defendants (the Company, John D. Carreker Jr., Ronald Antinori and Terry L. Gage), 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.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information about the Company’s purchases of shares of its common stock in the open market during the three months ended April 30, 2005:

Period	Total Number of Shares Purchased (1)	Average Price Paid Per Share		Total Number of Shares Purchased as part of Publicly Announced Plans or Programs	Maximum Number of Shares that may yet be Purchased under the Plans or Programs

4/1/2005 – 4/30/2005	70,000	$	4.98	70,000		(2)

(1) Does not include 88,000 shares settled on May 2, 2005 through May 4, 2005 at a cost of approximately $394,000.

(2) Under a share repurchase program approved by the Board of Directors of Carreker Corporation on April 18, 2005, the Company is authorized to repurchase up to $5.0 million of its common stock through October 14, 2005. The repurchase program is 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 will determine the time, amount, and price at which purchases of common stock will be made, subject to certain parameters established in advance by the Company.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.

~~ITEM 3.~~ ~~DEFAULTS UPON SENIOR~~ ~~SECURITIES~~

~~None.~~

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

None.

ITEM 5.OTHER INFORMATION

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:None.

•~~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 acceptance of our new technologies or services~~

•~~Receipt of cash payment~~

ITEM 6.EXHIBITS

Number		Exhibit Description

10.1		Form of Restricted Stock Agreement between the Company and its Executives

31.1		Certification Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

31.2		Certification Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

5447

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CARREKER CORPORATION

~~CARREKER CORPORATION~~

By:	/s/ John D. Carreker, Jr.	Date:	~~December 10, 2004~~ June 8, 2005
	John D. Carreker, Jr.
	Chairman of the Board and
	Chief Executive Officer


By:	/s/ Lisa K. Peterson	Date:	~~December 10, 2004~~ June 8, 2005
	Lisa K. Peterson
	Chief Financial Officer

5548

Period	Capitalized Software Costs		Acquired Developed Technology
November 1, 2004 – January 31, 2005	$	198	$	1,155
Fiscal year ending January 31, 2006	464		4,620
Fiscal year ending January 31, 2007	355		4,107
Fiscal year ending January 31, 2008	236		1,200

Period	Amount
November 1, 2004 — January 31, 2005	$	350
Fiscal year ending January 31, 2006	1,400
Fiscal year ending January 31, 2007	1,400
Fiscal year ending January 31, 2008	467

	Three Months ended October 31, 2004
	Revenue Enhancement		Global Payments Technologies		Global Payments Consulting			Corporate Unallocated			Total
Revenues:
Consulting fees	$	7,141	$	—	$	789		$	—		$	7,930
Software license fees	25		5,676		—			—			5,701
Software maintenance fees	371		10,956		164			—			11,491
Software implementation fees	161		4,393		68			—			4,622
Outsourcing services fees	—		—		—			50			50
Out-of-pocket expense reimbursements	289		369		155			—			813
Total revenues	$	7,987	$	21,394	$	1,176		$	50		$	30,607

Income (loss) from operations before amortization of customer relationships and restructuring and other charges	$	3,350	$	4,754	$	(588	)	$	(6,534	)	$	982

Amortization of customer relationships	—		350		—			—			350
Restructuring and other charges	—		—		199			67			266
Income (loss) from operations	$	3,350	$	4,404	$	(787	)	$	(6,601	)	$	366

	Nine Months ended October 31, 2004
	Revenue Enhancement		Global Payments Technologies			Global Payments Consulting			Corporate Unallocated			Total
Revenues:
Consulting fees	$	24,979	$	350		$	2,172		$	—		$	27,501
Software license fees	217		15,884			33			—			16,134
Software maintenance fees	755		31,426			626			—			32,807
Software implementation fees	476		10,234			433			—			11,143
Outsourcing services fees	—		—			—			60			60
Out-of-pocket expense reimbursements	1,083		936			346			—			2,365
Total revenues	$	27,510	$	58,830		$	3,610		$	60		$	90,010

Income (loss) from operations before amortization of customer relationships and restructuring and other charges	$	12,959	$	12,302		$	(1,417	)	$	(20,055	)	$	3,789

Amortization of customer relationships	—		1,050			—			—			1,050
Restructuring and other charges	1,747		(639		)	199			1,671			2,978
Income (loss) from operations	$	11,212	$	11,891		$	(1,616	)	$	(21,726	)	$	(239	)

	Nine Months ended October 31, 2003
	Revenue Enhancement		Global Payments Technologies			Global Payments Consulting			Corporate Unallocated			Total
Revenues:
Consulting fees	$	20,032	$	164		$	1,153		$	—		$	21,349
Software license fees	2,368		19,557			30			—			21,955
Software maintenance fees	879		33,229			656			—			34,764
Software implementation fees	722		13,023			640			—			14,385
Out-of-pocket expense reimbursements	1,242		1,739			386			—			3,367
Intercompany revenue	—		(165		)	165			—			—
Total revenues	$	25,243	$	67,547		$	3,030		$	—		$	95,820

Income (loss) from operations before amortization of customer relationships and restructuring and other charges	$	10,413	$	19,950		$	(2,869	)	$	(22,039	)	$	5,455

Amortization of customer relationships	—		1,050			—			—			1,050
Restructuring and other charges	—		(529		)	346			1,416			1,233
Income (loss) from operations	$	10,413	$	19,429		$	(3,215	)	$	(23,455	)	$	3,172

	Workforce Reductions			Credit relating to CheckFlow Suite			Facility Closures			EPG Litigation Settlement		Legal and Professional Fees		Total
YTD 2003:
Quarterly period ended April 30, 2003	$	545		$	—		$	—		$	—	$	139	$	684
Quarterly period ended July 31, 2003	648			—			—			—		130		778
Quarterly period ended October 31, 2003	(251		)	—			(119		)	—		141		(229		)
Total YTD 2003	$	942		$	—		$	(119	)	$	—	$	410	$	1,233

YTD 2004:
Quarterly period ended April 30, 2004	308			—			—			1,686		521		2,515
Quarterly period ended July 31, 2004	192			(1,215		)	—			14		1,206		197
Quarterly period ended October 31, 2004	246			—			—			—		20		266
Total YTD 2004	$	746		$	(1,215	)	$	—		$	1,700	$	1,747	$	2,978