PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

CARREKER CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share amounts)

ASSETS

	October 31,			January 31,
	2006			2006

Current assets
Cash and cash equivalents	$	24,248		$	29,684
Marketable securities	12,965			4,700
Accounts receivable, net of allowance of $695 and $601 at October 31, 2006 and January 31, 2006, respectively	15,111			12,225
Prepaid expenses and other current assets	2,366			2,940
Total current assets	54,690			49,549

Property and equipment, net of accumulated depreciation of $25,037 and $23,050 at October 31, 2006 and January 31, 2006, respectively	6,363			5,947
Capitalized software costs, net of accumulated amortization of $14,742 and $13,686 at October 31, 2006 and January 31, 2006, respectively	3,214			2,761
Acquired developed technology, net of accumulated amortization of $23,600 and $20,393 at October 31, 2006 and January 31, 2006, respectively	2,100			5,307
Goodwill, net of accumulated amortization of $3,405 at October 31, 2006 and January 31, 2006	20,765			20,765
Customer relationships, net of accumulated amortization of $7,583 and $6,533 at October 31, 2006 and January 31, 2006, respectively	817			1,867
Deferred loan costs, net of accumulated amortization of $1,707 and $1,571 at October 31, 2006 and January 31, 2006, respectively	—			136
Other assets	584			793
Total assets	$	88,533		$	87,125

Current liabilities
Accounts payable	$	1,206		$	1,168
Accrued compensation and benefits	6,543			6,153
Other accrued expenses	4,157			4,608
Income tax payable	84			220
Deferred revenue	17,862			19,151
Accrued merger and restructuring costs	212			334
Total current liabilities	30,064			31,634

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; 25,611 and 25,329 shares issued at October 31, 2006 and January 31, 2006, respectively	256			254
Additional paid-in capital	114,611			112,316
Accumulated deficit	(53,010		)	(53,848		)
Less treasury stock, at cost: 664 and 641 common shares at October 31, 2006 and January 31, 2006, respectively	(3,388		)	(3,231		)
Total stockholders’ equity	58,469			55,491
Total liabilities and stockholders’ equity	$	88,533		$	87,125

July 31,

January 31,

2006

2006

Current assets

Cash and cash equivalents

$
27,614

$
29,684

Marketable securities

5,900

4,700

Accounts receivable, net of allowance of $610 and $601 at July 31, 2006 and January 31, 2006, respectively

17,266

12,225

Prepaid expenses and other current assets

2,343

2,940

Total current assets

53,123

49,549

Property and equipment, net of accumulated depreciation of $24,265 and $23,050 at July 31, 2006 and January 31, 2006, respectively

6,593

5,947

Capitalized software costs, net of accumulated amortization of $14,333 and $13,686 at July 31, 2006 and January 31, 2006, respectively

3,359

2,761

Acquired developed technology, net of accumulated amortization of $22,617 and $20,393 at July 31, 2006 and January 31, 2006, respectively

3,083

5,307

Goodwill, net of accumulated amortization of $3,405 at July 31, 2006 and January 31, 2006

20,765

20,765

Customer relationships, net of accumulated amortization of $7,233 and $6,533 at July 31, 2006 and January 31, 2006, respectively

1,167

1,867

Deferred loan costs, net of accumulated amortization of $1,571 at January 31, 2006

—

136

Other assets

797

793

Total assets

$
88,887

$
87,125

Current liabilities

Accounts payable

$
1,086

$
1,168

Accrued compensation and benefits

6,190

6,153

Other accrued expenses

4,114

4,608

Income tax payable

77

220

Deferred revenue

19,366

19,151

Accrued merger and restructuring costs

247

334

Total current liabilities

31,080

31,634

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; 25,589 and 25,329 shares issued at July 31, 2006 and January 31, 2006, respectively

256

254

Additional paid-in capital

113,847

112,316

Accumulated deficit

(52,921
)
(53,848
)
Less treasury stock, at cost: 663 and 641 common shares at July 31, 2006 and January 31, 2006, respectively

(3,375
)
(3,231
)
Total stockholders’ equity

57,807

55,491

Total liabilities and stockholders’ equity

$
88,887

$
87,125

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,
	2006			2005			2006			2005

Revenues:
Consulting	$	8,939		$	6,720		$	24,336		$	24,540
Software license	2,864			5,322			10,914			12,463
Software maintenance	11,198			10,822			32,849			32,710
Software implementation and other services	3,876			4,585			12,260			13,611
Outsourcing services	511			220			1,551			718
Out-of-pocket expense reimbursements	887			701			2,413			2,446
Total revenues	28,275			28,370			84,323			86,488

Cost of revenues:
Consulting	5,154			4,369			14,824			12,887
Software license	1,985			2,155			5,710			5,519
Software maintenance	3,154			3,588			9,515			10,999
Software implementation and other services	3,167			3,562			9,181			10,217
Outsourcing services	414			424			1,404			1,437
Out-of-pocket expenses	960			701			2,508			2,299
Total cost of revenues	14,834			14,799			43,142			43,358
Gross profit	13,441			13,571			41,181			43,130

Operating costs and expenses:
Selling, general and administrative	11,087			11,191			33,290			33,688
Research and development	2,519			2,444			7,177			7,481
Amortization of customer relationships	350			350			1,050			1,050
Restructuring and other charges	—			780			—			903
Total operating costs and expenses	13,956			14,765			41,517			43,122
Income (loss) from operations	(515		)	(1,194		)	(336		)	8

Other income (expense):
Interest income	392			185			1,070			495
Interest expense	—			(122		)	(211		)	(334		)
Other income	134			283			649			718
Total other income, net	526			346			1,508			879
Income (loss) before provision for income taxes	11			(848		)	1,172			887
Provision for income taxes	100			102			334			285
Net income (loss)	$	(89	)	$	(950	)	$	838		$	602
Basic earnings (loss) per share	$	0.00		$	(0.04	)	$	0.03		$	0.03
Diluted earnings (loss) per share	$	0.00		$	(0.04	)	$	0.03		$	0.03
Shares used in computing basic earnings (loss) per share	24,159			23,906			24,029			24,152
Shares used in computing diluted earnings (loss) per share	24,159			23,906			24,456			24,533

Three Months Ended
July 31,

Six Months Ended
July 31,

2006

2005

2006

2005

Revenues:

Consulting

$
6,839

$
9,502

$
15,397

$
17,820

Software license

5,493

3,782

8,050

7,141

Software maintenance

10,899

10,576

21,651

21,888

Software implementation and other services

4,249

4,892

8,384

9,026

Outsourcing services

530

241

1,040

498

Out-of-pocket expense reimbursements

793

927

1,526

1,745

Total revenues

28,803

29,920

56,048

58,118

Cost of revenues:

Consulting

4,798

4,277

9,670

8,518

Software license

1,885

1,828

3,725

3,364

Software maintenance

3,189

3,436

6,361

7,411

Software implementation and other services

2,938

3,682

6,014

6,655

Outsourcing services

514

434

990

1,013

Out-of-pocket expenses

774

808

1,548

1,598

Total cost of revenues

14,098

14,465

28,308

28,559

Gross profit

14,705

15,455

27,740

29,559

Operating costs and expenses:

Selling, general and administrative

11,423

11,593

22,203

22,497

Research and development

2,453

2,516

4,658

5,037

Amortization of customer relationships

350

350

700

700

Restructuring and other charges

—

28

—

123

Total operating costs and expenses

14,226

14,487

27,561

28,357

Income from operations

479

968

179

1,202

Other income (expense):

Interest income

407

166

678

310

Interest expense

(106
)
(107
)
(211
)
(212
)
Other income

315

129

515

435

Total other income, net

616

188

982

533

Income before provision for income taxes

1,095

1,156

1,161

1,735

Provision for income taxes

134

102

234

183

Net income

$
961

$
1,054

$
927

$
1,552

Basic earnings per share

$
0.04

$
0.04

$
0.04

$
0.06

Diluted earnings per share

$
0.04

$
0.04

$
0.04

$
0.06

Shares used in computing basic earnings per share

24,041

24,127

23,986

24,326

Shares used in computing diluted earnings per share

24,461

24,421

24,407

24,703

See accompanying notes.

CARREKER CORPORATION

Condensed Consolidated Statements Of Stockholders’ Equity

(Unaudited)

(In thousands, except per share amounts)

	Common Stock					Additional					Treasury Stock				Total			Common Stock					Additional									Total
	Unrestricted	Restricted				Paid-In		Accumulated							Stockholders’			Unrestricted	Restricted				Paid-In		Accumulated			Treasury Stock				Stockholders’
	Shares	Shares		Amount		Capital		Deficit			Shares	Amount			Equity			Shares	Shares		Amount		Capital		Deficit			Shares	Amount			Equity

Balance at January 31, 2006	24,596	732		$	254	$	112,316	$	(53,848	)	641	$	(3,231	)	$	55,491		24,596	732		$	254	$	112,316	$	(53,848	)	641	$	(3,231	)	$	55,491

Cancellation of restricted stock	—	(7	)	—		—		—			—	—			—			—	(7	)	—		—		—			—	—			—
Compensation expense related to issuance of restricted stock	—	—		—		240		—			—	—			240			—	—		—		240		—			—	—			240
Compensation expense related to issuance of stock options	—	—		—		382		—			—	—			382			—	—		—		382		—			—	—			382
Issuance of restricted stock	—	46		—		—		—			—	—			—			—	46		—		—		—			—	—			—
Restricted shares withheld for payroll taxes	—	—		—		—		—			7	(45		)	(45		)	—	—		—		—		—			7	(45		)	(45		)
Conversion of restricted common stock to unrestricted	22	(22	)	—		—		—			—	—			—			22	(22	)	—		—		—			—	—			—
Net loss	—	—		—		—		(34		)	—	—			(34		)	—	—		—		—		(34		)	—	—			(34		)
Balance at April 30, 2006	24,618	749		254		112,938		(53,882		)	648	(3,276		)	56,034			24,618	749		254		112,938		(53,882		)	648	(3,276		)	56,034

Cancellation of restricted stock	—	(5	)	—		—		—			—	—			—			—	(5	)	—		—		—			—	—			—
Compensation expense related to issuance of restricted stock	—	—		1		286		—			—	—			287			—	—		1		286		—			—	—			287
Compensation expense related to issuance of stock options	—	—		—		340		—			—	—			340			—	—		—		340		—			—	—			340
Issuance of restricted stock	—	164		—		—		—			—	—			—			—	164		—		—		—			—	—			—
Restricted shares withheld for payroll taxes	—	—		—		—		—			15	(99		)	(99		)	—	—		—		—		—			15	(99		)	(99		)
Conversion of restricted common stock to unrestricted	124	(124	)	—		—		—			—	—			—			124	(124	)	—		—		—			—	—			—
Issuance of shares of common stock upon exercises of stock options	63	—		1		283		—			—	—			284			63	—		1		283		—			—	—			284
Net income	—	—		—		—		961			—	—			961			—	—		—		—		961			—	—			961
Balance at July 31, 2006	24,805	784		$	256	$	113,847	$	(52,921	)	663	$	(3,375	)	$	57,807		24,805	784		$	256	$	113,847	$	(52,921	)	663	$	(3,375	)	$	57,807

Cancellation of restricted stock																		—	(7	)	—		—		—			—	—			—
Compensation expense related to issuance of restricted stock																		—	—		—		303		—			—	—			303
Compensation expense related to issuance of stock options																		—	—		—		351		—			—	—			351
Issuance of restricted stock																		—	5		—		—		—			—	—			—
Restricted shares withheld for payroll taxes																		—	—		—		—		—			1	(13		)	(13		)
Conversion of restricted common stock to unrestricted																		6	(6	)	—		—		—			—	—			—
Issuance of shares of common stock upon exercises of stock options																		24	—		—		110		—			—	—			110
Net loss																		—	—		—		—		(89		)	—	—			(89		)
Balance at October 31, 2006																		24,835	776		256		114,611		(53,010		)	664	(3,388		)	58,469

See accompanying notes.

CARREKER CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

~~(Unaudited)~~
(In thousands)

	Three Months Ended July 31,						Six Months Ended July 31,						Three Months Ended October 31,						Nine Months Ended October 31,
	2006			2005			2006			2005			2006			2005			2006			2005
Operating Activities:
Net income	$	961		$	1,054		$	927		$	1,552
Net income (loss)													$	(89	)	$	(950	)	$	838		$	602
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment	707			805			1,486			1,598			818			793			2,304			2,391
Amortization of capitalized software costs	324			201			646			467			410			419			1,056			887
Amortization of acquired developed technology	1,069			1,155			2,224			2,310			983			1,155			3,207			3,465
Amortization of customer relationships	350			350			700			700			350			350			1,050			1,050
Amortization of deferred loan costs	68			68			136			135			—			68			136			203
Stock based compensation	627			130			1,249			258			654		��	247			1,904			505
Minority share of loss in Carretek LLC	(194		)	(213		)	(327		)	(531		)	(150		)	(269		)	(477		)	(799		)
Non-cash charge for merger costs	—			—			—			(32		)	—			—			—			(32		)
Allowance for doubtful accounts	76			(48		)	28			(41		)	98			95			126			54
Changes in operating assets and liabilities:
Accounts receivable	(7,385		)	(5,606		)	(5,069		)	(5,205		)	2,057			3,011			(3,012		)	(2,194		)
Prepaid expenses and other assets	200			363			647			(289		)	190			(147		)	836			(456		)
Accounts payable and accrued expenses	1,244			(242		)	(644		)	(2,606		)	398			708			(245		)	(1,898		)
Income taxes payable	(33		)	(275		)	(143		)	(264		)	7			107			(136		)	(157		)
Deferred revenue	(3,852		)	(3,620		)	215			(1,820		)	(1,504		)	(3,401		)	(1,289		)	(5,221		)
Net cash provided by (used in) operating activities	(5,838		)	(5,878		)	2,075			(3,768		)	4,222			2,186			6,298			(1,600		)

Investing Activities:
Purchases of property and equipment	(1,136		)	(588		)	(2,185		)	(1,286		)	(588		)	(523		)	(2,773		)	(1,809		)
Purchases of marketable securities	—			(4,600		)	(3,500		)	(4,600		)	(10,265		)	—			(13,765		)	(4,600		)
Sales of marketable securities	—			—			2,300			—			3,200			100			5,500			100
Software development costs capitalized	(718		)	(271		)	(1,244		)	(708		)	(265		)	—			(1,509		)	(690		)
Net cash used in investing activities	(1,854		)	(5,459		)	(4,629		)	(6,594		)	(7,918		)	(423		)	(12,547		)	(6,999		)

Financing Activities:
Proceeds from exercises of stock options	284			214			284			266			110			276			393			542
Purchase of treasury stock	—			(2,873		)	—			(3,222		)	—			(6		)	—			(3,228		)
Proceeds from minority shareholder equity contributions to Carretek LLC	200			—			200			551			220			380			420			931
Net cash provided by (used in) financing activities	484			(2,659		)	484			(2,405		)	330			650			813			(1,755		)
Net decrease in cash and cash equivalents	(7,208		)	(13,996		)	(2,070		)	(12,767		)
Net increase (decrease) in cash and cash equivalents													(3,366		)	2,413			(5,436		)	(10,354		)
Cash and cash equivalents at beginning of period	34,822			35,745			29,684			34,516			27,614			21,749			29,684			34,516
Cash and cash equivalents at end of period	$	27,614		$	21,749		$	27,614		$	21,749		$	24,248		$	24,162		$	24,248		$	24,162

Supplemental disclosures of cash flow information:
Cash paid for interest	$	38		$	38		$	76		$	76		$	13		$	39		$	89		$	115
Cash paid for income taxes, net	$	166		$	351		$	364		$	427		$	48		$	16		$	412		$	443

See accompanying notes.

Carreker Corporation

Notes to Condensed Consolidated Unaudited Financial Statements

For the Three and ~~Six~~Nine Months Ended ~~July~~October 31, 2006

1. Description of Business

For the last 28 years, Carreker Corporation (“the Company,” “Carreker,” “our,” “we”) has designed, developed, sold and delivered payments-related software and consulting solutions to financial institutions and financial service providers. More recently, we have introduced a business process outsourcing solution to our customers. Our products and services address a broad spectrum of payment activities and are designed to help our clients enhance the performance of their payments businesses; improve operational efficiency in payments processing; enhance revenue and profitability from payments-oriented products and services; reduce losses associated with fraudulent payment transactions; facilitate compliance with risk-related laws and regulations; and/or maximize clients’ customer income streams by aligning their customer interactions and products with customer needs. See Note 9 for a description of our business segments.

2. Summary of Significant Accounting Procedures

Principles of Consolidation

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.

The condensed consolidated unaudited financial statements also reflect the operations of Carretek LLC, which is a 51% owned subsidiary. The minority interest and minority share of net loss of Carretek LLC represent the 49% minority stockholder’s investment and share of the loss of this consolidated subsidiary. The minority interest is currently classified in other accrued expenses in the accompanying condensed consolidated unaudited balance sheet and the minority share of net loss of Carretek LLC is recorded in other income in the accompanying condensed consolidated unaudited statements of operations.

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 ~~six~~nine months ended ~~July~~October 31, 2006 are not necessarily indicative of full-year results.

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 maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist primarily of demand deposit accounts and demand money market accounts with nationally recognized financial institutions, along with domestic commercial paper. The Company utilizes a sweep service from a financial institution to invest daily in overnight repurchase agreements, typically in U.S. Treasury or agency issues.

Marketable Securities

We classify our investments in marketable securities as “available-for-sale” in accordance with the provisions of Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). We currently have no investments that we intend to hold for more than one year and therefore all investments are classified as short term investments.

Available-for-sale securities are carried at fair value with the unrealized gain or loss, net of tax, reported in other comprehensive income. Held-to-maturity securities are recorded at amortized cost. Unrealized losses considered to be “other-than-temporary” are recognized currently in earnings. The cost of securities sold is based on the specific identification method. The fair value of most investment securities is determined by currently available market prices. Where quoted market prices are not available, we use the market price of similar types of securities that are traded in the market to estimate fair value.

Marketable securities at ~~July~~October 31, 2006 consist of insured municipal bonds and guaranteed student loan backed debt securities, treasury notes, agency notes and corporate notes with a cost of ~~$5.9~~$13.0 million, which approximates fair value.

~~All~~Approximately $2.7 million of original maturities of debt securities classified as available for sale at ~~July~~October 31, 2006 were due after 10 years. All the debt securities are auction rate securities and the interest rates for these investments will adjust to current market rates at each interest reset date, which is typically on at least a monthly basis. The remainder of the debt securities have original maturities of less than two years.

Comprehensive Income

The Company has no other comprehensive income; accordingly, comprehensive income is the same as net income for all periods presented.

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 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 such as short term commercial paper and marketable debt securities along with accounts receivable. The Company places temporary cash investments with major banks and limits its exposure with any one financial institution, commercial issuer, municipal issuer or government agency issuer. The Company has not experienced any material credit losses on these investments.

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. During the three months ended ~~July~~October 31, 2006, ~~and 2005,~~ write-offs of receivables were ~~$37,000 and $9,000, respectively.~~$12,000. During the ~~six~~three months ended ~~July~~October 31, 2005, recoveries of receivables were $28,000. During the nine months ended October 31, 2006 and 2005, write-offs of receivables, net of recoveries, were ~~$19,000~~$31,000 and ~~$42,000,~~$14,000, respectively.

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

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 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 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 software costs incurred after the preliminary project stage is complete, the Company has committed to the project and it is probable that the software will be used to perform the function intended. Capitalized software costs are amortized on an individual basis using the estimated economic life of the product on a straight-line basis, generally three to five years. These capitalized software costs are included in “Equipment and Software”. Costs incurred during preliminary project and post-implementation stages are charged to expense.

The components of property and equipment are as follows (in thousands):

	July 31,			January 31,			October 31,			January 31,
	2006			2006			2006			2006

Furniture	$	5,049		$	5,070		$	5,052		$	5,070
Equipment and software	24,412			22,643			25,032			22,643
Leasehold improvements	1,397			1,284			1,316			1,284
Total cost	30,858			28,997			31,400			28,997

Less accumulated depreciation and amortization	(24,265		)	(23,050		)	(25,037		)	(23,050		)
Net property and equipment	$	6,593		$	5,947		$	6,363		$	5,947

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”). 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 could result in decreases in the related estimate of fair market value. The Company performs its annual impairment analysis as of November 1st of each year and whenever facts and circumstances indicate impairment may exist.

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”). 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 asset exceeds the estimated fair value of the asset.

Deferred Loan Costs

Deferred loan costs consist of loan closing costs associated with the Company’s revolving credit agreement. The Company chose not to renew the revolving credit agreement which expired by its terms on July 31, 2006. These costs were amortized to interest expense over the 36 month life of the revolving credit agreement and were fully amortized at July 31, 2006.

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 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~~product 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 five years). The Company capitalized ~~$718,000~~$265,000 and ~~$271,000~~$0 in the three months ended ~~July~~October 31, 2006 and 2005, respectively. The Company capitalized ~~$1.2~~$1.5 million and ~~$708,000~~$690,000 in the ~~six~~nine months ended ~~July~~October 31, 2006 and 2005, respectively. The software development efforts in both periods were related to several new Cash and Risk solutions within the Global Payments Technologies business segment, along with two new offerings within the Revenue Enhancement business segment.

The Company recorded amortization relating to software development costs capitalized of ~~$324,000~~$410,000 and ~~$201,000~~$419,000 in the three months ended ~~July~~October 31, 2006 and 2005, respectively. The Company recorded amortization relating to software development costs capitalized of ~~$646,000~~$1.1 million and ~~$467,000~~$887,000 in the ~~six~~nine months ended ~~July~~October 31, 2006 and 2005, respectively. Amortization expense is recorded as a component of cost of software license fees in the accompanying consolidated statements of operations.

Acquired developed technology includes purchased technology intangible assets associated with acquisitions. These purchased technology intangibles are initially recorded based on ~~the~~ fair value ~~ascribed~~assigned 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 ~~$1.1 million~~$983,000 and $1.2 million for the three months ended ~~July~~October 31, 2006 and 2005, respectively, and ~~$2.2~~$3.2 million and ~~$2.3~~$3.5 million for the ~~six~~nine months ended ~~July~~October 31, 2006 and 2005. 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 indicated fiscal years ending January 31 (in thousands):

Year	Capitalized Software Costs		Acquired Developed Technology		Capitalized Software Costs		Acquired Developed Technology

Remainder of 2007	$	577	$	1,883	$	338	$	900
2008	830		1,200		1,170		1,200
2009	331		—		672		—
2010					170		—

The table does not include the estimated amortization expense for ~~$1.6 million~~$864,000 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, 2006, 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 in the ~~six~~nine months ended ~~July~~October 31, 2006 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–Type and Certain Production–Type Contracts.”

In the case of non-software arrangements, we apply EITF No. 00-21 and revenues related to arrangements with multiple elements are allocated to each element based on the element’s relative fair value. Revenue allocated to separate elements is recognized for each element in accordance with our accounting policies described below. If we cannot account for items included in a multiple-element arrangement as separate units of accounting, they are combined and accounted for as a single unit of accounting and generally recognized as the undelivered items or services are provided to the customer.

Consulting. 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 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 estimable. 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 once customer acknowledgement is obtained that confirms fees have become fixed and determinable. In some cases, these acknowledgements contain future deliverables or services, in which case the revenue from these engagements is recognized on a proportionate performance basis based on efforts to be incurred following the customer acknowledgement. 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. A perpetual 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. A term software license is sold either together with implementation services and/or with maintenance services. These term licenses are usually paid in annual installments over the term of the license. If the term software license is sold without essential implementation services, the revenue is recognized ratably over the non-cancelable license term. If the term license is sold with essential implementation services, the license revenue is recognized as the lesser of the amount of license revenue recognized as services are performed or on a ratable basis.

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. 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 and Other Services. 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. We currently recognize revenue based on the number of items processed. These services are billed currently on a monthly basis.

Return Provisions. 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

The Company is required to pay royalties in connection with software license, maintenance, and consulting agreements entered into with certain customers under which the Company acquired third party software technology or other intellectual property used in products and services sold to its customers. Under these arrangements, the Company recognizes royalty expense when the associated revenue is recognized. For current product offerings, the royalty percentages generally range from 20% to ~~50%~~70% of the associated revenues. Approximately ~~$543,000~~$686,000 and ~~$535,000~~$665,000 of royalty expense was recorded under these agreements in the three months ended ~~July~~October 31, 2006 and 2005, respectively, and ~~$982,000~~$1.7 million and ~~$749,000~~$1.4 million of royalty expense was recorded under these agreements in the ~~six~~nine months ended ~~July~~October 31, 2006 and 2005. Royalty expense is primarily included as a component of the cost of software license revenues; however, certain amounts are also included in cost of consulting revenues and cost of software maintenance revenues in the accompanying 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 consists of the following (in thousands):

	July 31,			January 31,			October 31,			January 31,
	2006			2006			2006			2006

Deferred software maintenance fees	$	24,596		$	39,343		$	20,484		$	39,343
Deferred software implementation and license fees	15,533			15,769			11,321			15,769
	40,129			55,112			31,805			55,112
Less amounts not yet collected	(20,763		)	(35,961		)	(13,943		)	(35,961		)
Net deferred revenue	$	19,366		$	19,151		$	17,862		$	19,151

Research and Development Costs

Research and development costs which are not subject to capitalization under Statement of Financial Accounting Standards No. 86, “Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed” (“SFAS 86”), are expensed as incurred and relate mainly to the development of new products, 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 maintenance fees.

Other income (expense)

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

	Three Months Ended July 31,						Six Months Ended July 31,						Three Months Ended October 31,					Nine Months Ended October 31,
	2006			2005			2006			2005			2006			2005		2006			2005

Minority share of net loss of Carretek LLC	$	194		$	213		$	327		$	531		$	150		$	269	$	477		$	799
Foreign exchange gains (losses)	123			(84		)	193			(101		)	(18		)	12		175			(89		)
Other	(2		)	—			(5		)	5			2			2		(3		)	8
Total	$	315		$	129		$	515		$	435		$	134		$	283	$	649		$	718

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, in accordance with the provisions of SFAS No. 128, “Earnings per Share,” (“SFAS 128”) 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.

Stock-Based Compensation

The Company has two stock-based employee compensation plans which are more fully described in the Company’s 2005 Annual Report on Form 10-K for the year ended January 31, 2006.

On February 1, 2006, the Company adopted, on a modified prospective basis, SFAS 123(R), “Share Based Payment” (“SFAS 123(R)”). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options and shares purchased under an employee stock purchase plan (if certain parameters are not met), to be recognized in the financial statements based on their fair value.

Upon the adoption of SFAS 123(R), the Company began recording compensation cost related to the continued vesting of stock options that remained unvested as of February 1, 2006, as well as for all new stock option grants after our adoption date. The compensation cost to be recorded is based on the fair value at the grant date. The adoption of SFAS 123(R) did not have an effect on our recognition of compensation expense relating to the vesting of restricted stock grants.

Prior to the adoption of SFAS 123(R), any cash flows resulting from the tax benefit related to equity-based compensation was presented in operating cash flows, along with other tax cash flows, in accordance with the provisions of EITF 00-15, “Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option” (“EITF 00-15”). SFAS 123(R) superseded EITF 00-15, amended SFAS 95, “Statement of Cash Flows,” and requires tax benefits relating to excess equity-based compensation deductions to be prospectively presented in the statement of cash flows as financing cash inflows.

Prior to the adoption of SFAS 123(R), we accounted for equity-based compensation under the provisions and related interpretations of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Accordingly, we were not required to record compensation expense when stock options were granted to our employees as long as the exercise price was not less than the fair market value of the stock at the grant date.

As a result of adopting SFAS 123(R) on February 1, 2006, the Company’s net income for the three and ~~six~~nine months ended ~~July~~October 31, 2006 is ~~$340,000~~$351,000 and ~~$722,000~~$1.1 million lower, respectively, than if it had continued to account for share-based compensation under APB 25. Basic earnings per share for the three and ~~six~~nine months ended ~~July~~October 31, 2006 are $0.01 and ~~$0.03~~$0.05 lower, respectively, and diluted earnings per share for the three and ~~six~~nine months ended ~~July~~October 31, 2006 are $0.01 and ~~$0.03~~$0.05 lower, respectively, than if the Company had continued to account for share-based compensation under APB 25.

Determining Fair Value

Valuation and Amortization Method. The Company estimates the fair value of share-based awards granted using the Black-Scholes option valuation model. The Company amortizes the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods.

Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life using the “simplified method” in accordance with Staff Accounting Bulletin No. 107.

Expected Volatility. Using the Black-Scholes option valuation model, the Company estimates the volatility of its common stock at the date of grant based on the historical volatility of our common stock.

Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award.

Expected Dividend Yield. The Company has not paid any cash dividends on its common stock in the last ten years and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model.

Expected Forfeitures. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation only for those awards that are expected to vest.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. A summary of the weighted average assumptions and results for options granted during the three and ~~six~~nine months ended ~~July~~October 31, 2006 are as follows:

	Three Months Ended July 31,						Six Months Ended July 31,						Three Months Ended October 31,						Nine Months Ended October 31,
	2006			2005			2006			2005			2006			2005			2006			2005

Volatility	0.745			0.835			0.744			0.837			0.608			0.904			0.704			0.857
Weighted-average expected lives (years)	4.500			4.000			4.400			4.000			5.400			5.000			4.700			4.300
Expected dividend yields	—			—			—			—			—			—			—			—
Weighted-average risk-free interest rates	5.06		%	3.91		%	5.02		%	3.91		%	5.07		%	4.00		%	5.03		%	3.94		%
Weighted-average fair value of options granted	$	4.02		$	3.61		$	3.93		$	3.63		$	4.94		$	4.63		$	4.23		$	3.93

Share-Based Compensation

The following table summarizes share-based compensation expense related to share-based awards under SFAS No. 123(R) for the three and ~~six~~nine months ended ~~July~~October 31, 2006 and 2005 which is recorded in the statement of operations as follows (in thousands):

	Three Months Ended July 31, 2006						Six Months Ended July 31, 2006						Three Months Ended October 31, 2006						Nine Months Ended October 31, 2006
	Unvested Stock Options		Unvested Restricted Common Stock		Total		Unvested Stock Options		Unvested Restricted Common Stock		Total		Unvested Stock Options		Unvested Restricted Common Stock		Total		Unvested Stock Options		Unvested Restricted Common Stock		Total

Cost of revenues	$	63	$	98	$	161	$	133	$	184	$	317	$	41	$	101	$	142	$	175	$	285	$	460
Selling, general and administrative expense	274		175		449		578		316		894		310		188		498		887		504		1,391
Research and development expense	3		14		17		11		27		38		—		14		14		11		42		53
Total share-based compensation	$	340	$	287	$	627	$	722	$	527	$	1,249	$	351	$	303	$	654	$	1,073	$	831	$	1,904

	Three Months Ended July 31, 2005						Six Months Ended July 31, 2005						Three Months Ended October 31, 2005						Nine Months Ended October 31, 2005
	Unvested Stock Options		Unvested Restricted Common Stock		Total		Unvested Stock Options		Unvested Restricted Common Stock		Total		Unvested Stock Options		Unvested Restricted Common Stock		Total		Unvested Stock Options		Unvested Restricted Common Stock		Total

Cost of revenues	$	—	$	71	$	71	$	—	$	126	$	126	$	—	$	81	$	81	$	—	$	208	$	208
Selling, general and administrative expense	—		50		50		—		118		118		—		150		150		—		267		267
Research and development expense	—		9		9		—		14		14		—		16		16		—		30		30
Total share-based compensation	$	—	$	130	$	130	$	—	$	258	$	258	$	—	$	247	$	247	$	—	$	505	$	505

At ~~July~~October 31, 2006, the Company had unvested options to purchase ~~645,721~~695,156 shares with a weighted average grant date fair value of ~~$3.88.~~$4.00. Additionally, the Company had ~~783,949~~776,379 shares of unvested restricted common stock with a weighted average fair value on the dates the awards were granted of $6.22.

The unrecognized compensation costs are expected to be amortized over the following indicated fiscal years ending January 31 (in thousands):

	Unvested Stock Options		Unvested Restricted Common Stock		Total		Unvested Stock Options		Unvested Restricted Common Stock		Total

Remainder of 2007	$	417	$	610	$	1,027	$	340	$	304	$	644
2008	756		1,219		1,975		1,036		1,215		2,251
2009	509		1,129		1,638		519		1,125		1,644
2010	123		853		976		130		851		981
2011	—		454		454		—		456		456
2012	—		75		75		—		78		78
Total	$	1,805	$	4,340	$	6,145	$	2,025	$	4,029	$	6,054

Stock Option Activity

In the quarter ended January 31, 2006, the Company accelerated the vesting of all unvested stock options, except those options granted to the CEO, with a grant price in excess of $7.50. This acceleration was accomplished to reduce the stock option expense in future years. This acceleration results in approximately $1.9 million of expense savings over the four year period from February 1, 2006 through January 31, 2010.

On March 10, 2006, the Compensation Committee of the Board of Directors of the Company (the “Committee”) voted to provide for the automatic accelerated vesting of all outstanding stock options and restricted stock of the Company upon the occurrence of certain specified triggering events deemed to constitute a change in control of the Company. This provision will require the Company to accelerate unrecognized stock-based compensation expense if a change in control event occurs prior to the original vesting schedule of the stock options or restricted stock.

~~Pursuant to the Director Stock Option Plan, each outside director on August 1~~st ~~is granted a number of options with a Black-Scholes fair value of $60,000. Therefore, on August 1, 2006 each outside director received 11,976 options or 107,784 options in the aggregate.~~

Stock option transactions during the ~~six~~nine months ended ~~July~~October 31, 2006 were as follows (dollars and share data in thousands):

	Six Months Ended July 31, 2006							Nine Months Ended October 31, 2006
	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value		Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value

Stock options outstanding at the beginning of the period	3,781		$	8.44	—	—		3,781		$	8.44	—	—
Granted	279		6.42		—	—		394		6.52		—	—
Exercised	(63	)	4.52		—	—		(87	)	4.55		—	—
Forfeited	(72	)	8.74		—	—		(95	)	8.93		—	—
Stock options outstanding at the end of the period	3,925		$	8.36	4.33	$	2,436	3,993		$	8.33	4.27	$	3,593

Stock options vested and exercisable at the end of the period	3,279		$	8.85	4.24	$	1,842	3,298		$	8.82	4.11	$	2,605

Other information pertaining to option activity during the ~~six~~nine months ended ~~July~~October 31, 2006 was as follows (dollars in thousands, except per share data):

Weighted average grant-date fair value of options granted	$	3.93	$	4.23
Total fair value of stock options vested	$	1,371	$	1,665
Total intrinsic value of stock options exercised	$	145	$	191

Information related to options outstanding at ~~July~~October 31, 2006 is summarized below (option amounts in thousands):

Range of Exercise Price	Options Outstanding at July 31, 2006	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Options Vested and Exercisable at July 31, 2006	Weighted Average Exercise Price of Vested and Exercisable Options		Options Outstanding at October 31, 2006	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Options Vested and Exercisable at October 31, 2006	Weighted Average Exercise Price of Vested and Exercisable Options
$3.00 to $4.97	1,020	$	4.63	4.28	838	$	4.68	996	$	4.63	4.05	818	$	4.68
$5.00 to $7.79	830	6.32		5.45	384	6.35		943	6.38		5.75	445	6.37
$8.00 to $9.88	795	8.62		4.07	795	8.62		784	8.63		3.81	784	8.63
$10.00 to $25.44	1,280	12.48		3.79	1,262	12.51		1,270	12.49		3.63	1,251	12.52
	3,925	$	8.36	4.33	3,279	$	8.85	3,993	$	8.33	4.27	3,298	$	8.82

As of ~~July~~October 31, 2006, the Company has reserved for issuance under ~~the Plans 5,190,995~~its stock-based compensation plans 5,168,694 shares of common stock, of which ~~3,925,062~~3,993,368 shares are subject to currently outstanding options to employees and directors, and ~~1,265,933~~1,175,326 shares are reserved for future awards.

Restricted Common Stock Activity

For the stock compensation expense related to the restricted common stock issued to employees and officers, 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 ~~$287,000~~$303,000 and ~~$130,000~~$247,000 of compensation expense related to the restricted common stock during the three months ended ~~July~~October 31, 2006 and 2005, respectively, and ~~$528,000~~$831,000 and ~~$258,000~~$505,000 for the ~~six~~nine months ended ~~July~~October 31, 2006 and 2005, respectively. Restricted common stock transactions during the ~~six~~nine months ended ~~July~~October 31, 2006 were as follows (number of shares in thousands):

	Six Months Ended July 31, 2006				Nine Months Ended October 31, 2006
	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value

Restricted common stock unvested at the beginning of the period	732		$	6.14	732		$	6.14
Granted	210		6.34		215		6.35
Vested and released	(146	)	5.98		(152	)	5.99
Forfeited	(12	)	6.41		(19	)	6.39
Restricted common stock unvested at the end of the period	784		$	6.22	776		$	6.22

Prior Period Proforma Presentations

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(R), net income and net income per share would have been as follows (in thousands, except per share data):

	Three Months Ended			Six Months Ended			Three Months Ended			Nine Months Ended
	July 31, 2005			July 31, 2005			October 31, 2005			October 31, 2005

Net income, as reported	$	1,054		$	1,552
Net income (loss), as reported							$	(950	)	$	602
Stock compensation expense recorded under the intrinsic value method	130			258			247			505
Pro forma stock compensation expense computed under the fair value method	(989		)	(1,743		)	(1,097		)	(2,891		)
Pro forma net income	$	195		$	67
Pro forma net loss							$	(1,800	)	$	(1,784	)

Basic earnings per common share, as reported	$	0.04		$	0.06
Diluted earnings per common share, as reported	$	0.04		$	0.06
Basic earnings (loss) per common share, as reported							$	(0.04	)	$	0.03
Diluted earnings (loss) per common share, as reported							$	(0.04	)	$	0.03
Pro forma basic loss per common share	$	0.01		$	0.00		$	(0.08	)	$	(0.07	)
Pro forma diluted loss per common share	$	0.01		$	0.00		$	(0.08	)	$	(0.07	)

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 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 most 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 generally 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 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 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, officers and key employees 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 the members of its board of directors or officers that are probable losses in excess of amounts covered by its D&O insurance.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” – an interpretation of FAS 109, “Accounting for Income Taxes” (“FIN 48”) to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 as of February 1, 2007, as required. The cumulative effect of adopting FIN 48 will be recorded in retained earnings and other accounts as applicable. The Company has not determined the effect, if any, that the adoption of FIN 48 will have on the Company’s financial position and results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157) , which provides guidance on how to measure assets and liabilities that use fair value. SFAS 157 will apply whenever another US GAAP standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. This standard also will require additional disclosures in both annual and quarterly reports. SFAS 157 will be effective for financial statements issued for fiscal years beginning after November 15, 2007, and will be adopted by the Company on February 1, 2008. The Company is currently evaluating the potential impact this standard may have on its financial position and results of operations, but do not believe the impact of the adoption will be material.

Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. Other intangible assets, which include acquired developed technology and customer relationships, are amortized over their estimated useful lives.

Customer relationships, obtained in the acquisition of Check Solutions in June 2001, with finite useful lives are amortized on a straight-line basis, which resulted in amortization expense of $350,000 during the three months ended ~~July~~October 31, 2006 and 2005, ~~respectively,~~ and ~~$700,000~~$1.1 million during the ~~six~~nine months ended ~~July~~October 31, 2006 and 2005.

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

During the fourth quarter of the year ended January 31, 2006, the Company performed its annual evaluation for goodwill impairment and determined that the carrying amount of goodwill was not impaired and subsequently has noted no factors that would indicate impairment.

The Company ~~has~~had been 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 chose not to renew the credit facility, which expired by its terms on July 31, 2006, as current cash on hand, marketable securities and cash generated from operations are believed to be sufficient to meet the Company’s cash requirements for the foreseeable future. By not renewing the facility, the Company will be able to avoid certain fees and expenses associated with renewing and maintaining a line of credit.

Interest expense, including the commitment fee and exclusive of the amortization of deferred loan costs on the credit agreement, was ~~$38,000~~$0 and $54,000 for the three months ended ~~July~~October 31, 2006 and 2005, respectively, and $76,000 and $130,000 for the ~~six~~nine months ended ~~July~~October 31, 2006 and ~~2005.~~2005, respectively.

The Company has established a valuation allowance to reserve its net deferred tax assets at ~~July~~October 31, 2006 because of the Company’s inconsistent history of generating profitable operations and taxable income. The tax provision was computed based on actual results by jurisdiction which resulted in a foreign tax provision of ~~$134,000~~$100,000 and $102,000 for the three months ended ~~July~~October 31, 2006 and 2005, respectively, and ~~$234,000~~$314,000 and ~~$183,000~~$270,000 for the ~~six~~nine months ended ~~July~~October 31, 2006 and 2005, respectively. In addition to the provision for foreign taxes, the Company recorded $20,000 and $15,000 of U.S. Federal and State tax expense in the ~~three and six~~nine months ended ~~July~~October 31, 2006 and 2005, respectively, for alternative minimum tax purposes.

The Company has adopted a 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. Employer matching contributions amounted to ~~$256,000~~$213,000 and ~~$267,000~~$215,000 for the three months ended ~~July~~October 31, 2006 and 2005, respectively, and ~~$542,000~~$756,000 and ~~$605,000~~$820,000 for the ~~six~~nine months ended ~~July~~October 31, 2006 and 2005, respectively. The Company may make additional contributions at the discretion of the Board of Directors. No discretionary contributions were made during the three and ~~six~~nine months ended ~~July~~October 31, 2006 and 2005.

The Carreker Incentive Bonus Plan (“CIBP”) awards employees bonuses based on the Company’s 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. The Company’s Compensation Committee of the Board of Directors has the authority to determine the final amount of the bonus that is ultimately paid to the officers of the Company. In the three months ended ~~July~~October 31, 2006 and 2005, the Company reversed expense under this plan of approximately $39,000 and recorded expense of $364,000, respectively. In the nine months ended October 31, 2006 and 2005, the Company recorded expense under this plan of approximately ~~$504,000~~$465,000 and ~~$19,000, respectively. In the six months ended July 31, 2006 and 2005, the Company recorded expense under this plan of approximately $504,000 and $263,000, respectively.~~

The Company pays discretionary bonuses to key employees based primarily on the extent to which individuals meet agreed-upon objectives for the year. The Company recorded discretionary bonus expense of approximately $0 and $459,000 for the three months ended July 31, 2006 and 2005, respectively, and $0 and $724,000 for the six months ended July 31, 2006 and 2005,$627,000, respectively.

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

Options for ~~2,439,901~~3,993,368 shares and ~~2,609,894~~3,870,944 shares for the three months ended ~~July~~October 31, 2006 and 2005, respectively, and ~~2,439,901~~2,532,374 shares and ~~2,666,520~~2,608,263 shares for the ~~six~~nine months ended ~~July~~October 31, 2006 and 2005, respectively, have been excluded from the diluted earnings per share computation as the options were anti-dilutive.

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 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 to file an amended complaint. Also the Court dismissed, with prejudice, all claims by shareholders relating to periods prior to July 31, 1999.

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

On April 21, 2006, counsel for the plaintiffs and defendants agreed to settle the class action litigation for a payment of $5,250,000. The District Court entered a Final Judgment and Order of Dismissal with Prejudice on August 17, 2006 concluding the litigation. The settlement payment in the class action was fully covered by the Company’s directors and officer’s insurance policies.

The Company is periodically involved in ~~various other legal actions~~litigation and claims which arise in the normal course of business. In ~~the~~management’s opinion, ~~of management, the final disposition of these matters~~no pending proceeding is ~~not~~reasonably expected to have a material adverse effect on the Company’s financial position or results of operations.

9. Business Segments and Revenue Concentration

The tables below show revenues and income (loss) from operations for the periods indicated for our four reportable business segments: Revenue Enhancement, Global Payments Technologies, Global Payments Consulting and Business Process Outsourcing. 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, and certain unallocated corporate overhead expense such as executive management, finance, accounting, human resources, legal and certain IT and facility functions. Business segment results, which include costs for research and development 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 July 31, 2006															Three months ended October 31, 2006
	Revenue Enhancement		Global Payments Technologies		Global Payments Consulting			Business Process Outsourcing			Corporate Unallocated			Total		Revenue Enhancement		Global Payments Technologies		Global Payments Consulting		Business Process Outsourcing			Corporate Unallocated			Total
Revenues
Consulting	$	6,251	$	121	$	467		$	—		$	—		$	6,839	$	8,001	$	97	$	841	$	—		$	—		$	8,939
Software license	69		5,396		28			—			—			5,493		72		2,759		33		—			—			2,864
Software maintenance	69		10,599		231			—			—			10,899		77		10,903		218		—			—			11,198
Software implementation and other services	641		3,399		209			—			—			4,249		394		3,201		281		—			—			3,876
Outsourcing services	—		—		—			530			—			530		—		—		—		511			—			511
Out-of-pocket expense reimbursements	323		387		83			—			—			793		345		455		87		—			—			887
Total revenues	$	7,353	$	19,902	$	1,018		$	530		$	—		$	28,803	$	8,889	$	17,415	$	1,460	$	511		$	—		$	28,275

Income (loss) from operations	$	1,740	$	4,528	$	(176	)	$	(360	)	$	(5,253	)	$	479	$	3,125	$	2,130	$	147	$	(299	)	$	(5,618	)	$	(515	)

	Three months ended July 31, 2005														Three months ended October 31, 2005
	Revenue Enhancement		Global Payments Technologies		Global Payments Consulting		Business Process Outsourcing			Corporate Unallocated			Total		Revenue Enhancement		Global Payments Technologies		Global Payments Consulting			Business Process Outsourcing			Corporate Unallocated			Total
Revenues
Consulting	$	8,832	$	2	$	668	$	—		$	—		$	9,502	$	6,371	$	—	$	349		$	—		$	—		$	6,720
Software license	252		3,415		115		—			—			3,782		235		5,056		31			—			—			5,322
Software maintenance	152		10,210		214		—			—			10,576		286		10,325		211			—			—			10,822
Software implementation and other services	1,176		3,523		193		—			—			4,892		811		3,370		404			—			—			4,585
Outsourcing services	—		—		—		241			—			241		—		—		—			220			—			220
Out-of-pocket expense reimbursements	485		331		111		—			—			927		326		297		78			—			—			701
Total revenues	$	10,897	$	17,481	$	1,301	$	241		$	—		$	29,920	$	8,029	$	19,048	$	1,073		$	220		$	—		$	28,370

Income (loss) from operations	$	5,470	$	1,690	$	8	$	(430	)	$	(5,770	)	$	968	$	2,197	$	2,412	$	(208	)	$	(544	)	$	(5,051	)	$	(1,194	)

Six months ended July 31, 2006

Revenue
Enhancement

Global
Payments
Technologies

Global
Payments
Consulting

Business
Process
Outsourcing

Corporate
Unallocated

Total

Revenues

Consulting

$
13,769

$
262

$
1,366

$
—

$
—

$
15,397

Software license

248

7,531

271

—

—

8,050

Software maintenance

164

21,025

462

—

—

21,651

Software implementation and other services

1,176

6,604

604

—

—

8,384

Outsourcing services

—

—

—

1,040

—

1,040

Out-of-pocket expense reimbursements

594

698

234

—

—

1,526

Total revenues

$
15,951

$
36,120

$
2,937

$
1,040

$
—

$
56,048

Income (loss) from operations

$
5,133

$
6,183

$
277

$
(651
)
$
(10,763
)
$
179

	Six months ended July 31, 2005															Nine months ended October 31, 2006
	Revenue Enhancement		Global Payments Technologies		Global Payments Consulting			Business Process Outsourcing			Corporate Unallocated			Total		Revenue Enhancement		Global Payments Technologies		Global Payments Consulting		Business Process Outsourcing			Corporate Unallocated			Total
Revenues
Consulting	$	16,554	$	52	$	1,214		$	—		$	—		$	17,820	$	21,770	$	359	$	2,207	$	—		$	—		$	24,336
Software license	553		6,473		115			—			—			7,141		320		10,289		305		—			—			10,914
Software maintenance	265		21,180		443			—			—			21,888		241		31,928		680		—			—			32,849
Software implementation and other services	1,652		7,072		302			—			—			9,026		1,570		9,805		885		—			—			12,260
Outsourcing services	—		—		—			498			—			498		—		—		—		1,551			—			1,551
Out-of-pocket expense reimbursements	872		672		201			—			—			1,745		939		1,153		321		—			—			2,413
Total revenues	$	19,896	$	35,449	$	2,275		$	498		$	—		$	58,118	$	24,840	$	53,534	$	4,398	$	1,551		$	—		$	84,323

Income (loss) from operations	$	9,408	$	3,763	$	(292	)	$	(1,056	)	$	(10,621	)	$	1,202	$	8,258	$	8,312	$	424	$	(951	)	$	(16,379	)	$	(336	)

	Nine months ended October 31, 2005
	Revenue Enhancement		Global Payments Technologies		Global Payments Consulting			Business Process Outsourcing			Corporate Unallocated			Total
Revenues
Consulting	$	22,925	$	53	$	1,562		$	—		$	—		$	24,540
Software license	788		11,528		147			—			—			12,463
Software maintenance	551		31,506		653			—			—			32,710
Software implementation and other services	2,463		10,442		706			—			—			13,611
Outsourcing services	—		—		—			718			—			718
Out-of-pocket expense reimbursements	1,198		968		280			—			—			2,446
Total revenues	$	27,925	$	54,497	$	3,348		$	718		$	—		$	86,488

Income (loss) from operations	$	11,605	$	6,175	$	(500	)	$	(1,601	)	$	(15,671	)	$	8

During the year ended January 31, 2004, the Company formed Carretek LLC (Carretek), in which it owns a 51% interest, to offer financial institutions offshore-centric outsourcing of their business processes and IT services needs. During July 2004, Carretek signed its first contract to perform outsourced services with a customer.

The 49% share relating to the minority interest in the Carretek losses, which was ~~$194,000~~$150,000 and ~~$213,000~~$269,000 for the three months ended ~~July~~October 31, 2006 and 2005, respectively, and ~~$327,000~~$477,000 and ~~$531,000~~$799,000 for the ~~six~~nine months ended ~~July~~October 31, 2006 and 2005, respectively, was recorded in other income in the accompanying consolidated statements of operations. The Company and its partner have funded Carretek to date in the aggregate amount of ~~$4.9~~$5.4 million of equity. Carretek’s operations are included in our business process outsourcing segment.

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				Six Months Ended
	July 31,				July 31,				Three Months Ended October 31,				Nine Months Ended October 31,
	2006		2005		2006		2005		2006		2005		2006		2005

Single customer	12.1	%	15.0	%	16.6	%	12.2	%	13.3	%	13.0	%	12.2	%	12.4	%
Top five customers	42.4	%	39.0	%	42.6	%	38.3	%	41.2	%	41.3	%	37.2	%	35.1	%

~~U.S. Bank~~National City accounted for approximately ~~12.1%~~13.3% of total revenues during the three months ended ~~July~~October 31, 2006 and ~~National City Corporation~~Wells Fargo accounted for approximately ~~15.0%~~13.0% of total revenues during the three months ended ~~July~~October 31, 2005. U.S. Bank ~~accounted for approximately 16.6% of total revenues during the six months ended July 31, 2006 and Wells Fargo~~ accounted for approximately 12.2% of total revenues during the ~~six~~nine months ended ~~July~~October 31, 2006 and Wells Fargo accounted for approximately 12.4% of total revenues during the nine months ended October 31, 2005.

The Company markets its solutions in several foreign countries. Revenues, exclusive of out-of-pocket expense reimbursements, attributed to countries based on the location of the customers were as follows (in thousands):

	Three Months Ended
	July 31,				July 31,
	2006				2005				Three Months Ended
	Amount		Percent of total revenues		Amount		Percent of total revenues		October 31, 2006				October 31, 2005
									Amount		Percent of total revenues		Amount		Percent of total revenues
United States	$	23,148	83	%	$	20,890	72	%	$	21,624	79	%	$	19,993	72	%
Europe	1,269		4		1,548		5		1,450		5		3,646		13
Canada	1,871		7		1,562		6		2,617		10		1,800		7
Asia Pacific	1,282		4		1,769		6		1,177		4		1,428		5
South Africa	188		1		2,410		8		198		1		142		1
Other	252		1		814		3		322		1		660		2
Total revenues	$	28,010	100	%	$	28,993	100	%	$	27,388	100	%	$	27,669	100	%

	Six Months Ended
	July 31,				July 31,
	2006				2005				Nine Months Ended
	Amount		Percent of total revenues		Amount		Percent of total revenues		October 31, 2006				October 31, 2005
									Amount		Percent of total revenues		Amount		Percent of total revenues
United States	$	44,686	82	%	$	40,962	73	%	$	66,359	81	%	$	60,838	72	%
Europe	2,367		4		3,319		6		3,817		5		7,113		9
Canada	3,831		7		3,422		6		6,482		8		5,223		6
Asia Pacific	2,376		4		2,831		5		3,519		4		4,227		5
South Africa	402		1		4,420		8		551		1		4,563		6
Other	860		2		1,419		2		1,182		1		2,078		2
Total revenues	$	54,522	100	%	$	56,373	100	%	$	81,910	100	%	$	84,042	100	%

10. Restructuring and Other Charges

There were no restructuring and other charges recorded during Q1fiscal 2006. ~~However,~~ However, in Q1 2005, the Company recorded $127,000 in restructuring and other charges, ~~during Q1 2005,~~ principally associated with the separation of 6six employees. ~~The~~Additionally in Q1 2005, the Company also lowered its estimate by $32,000 for the costs associated with the discontinuance of one of ~~its~~our software offerings originally recorded in January 2004.

~~There were no restructuring and other charges recorded during~~ In Q2 ~~2006. However,~~ 2005, the Company recorded $28,000 in restructuring and other charges, ~~during Q2 2005,~~ principally associated with the separation of 2 employees. Finally, in Q3 2005, the Company recorded $780,000 in restructuring and other charges, principally associated with the separation of 29 employees primarily within the GPT business segment.

The activity related to the accrued merger and restructuring costs during the three and ~~six~~nine months ended ~~July~~October 31, 2006 is as follows (in thousands):

	Workforce Reductions			CheckFlow Suite		Other		Total			Workforce Reductions			CheckFlow Suite		Other			Total

Reserve balance at January 31, 2006	$	87		$	200	$	47	$	334		$	87		$	200	$	47		$	334
Cash paid	(87		)	—		—		(87		)	(87		)	—		(35		)	(122		)
Reserve balance at April 30, 2006 and July 31, 2006	$	—		$	200	$	47	$	247
Reserve balance at October 31, 2006											$	—		$	200	$	12		$	212

The Company expects to complete these existing obligations by the end of the fiscal year ending January 31, 2007.

Item 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 “Risk Factors” contained in our Form 10-K for the year ended January 31, 2006, 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, relatively fixed costs, product and service mix, lack of long-term agreements, dependence on key personnel, rapid technological change and dependence on new products, strategic alliances or acquisitions, focus on providing business process outsourcing with a significant offshore component, ability to attract and retain qualified personnel, customer concentration, competition, proprietary rights, infringement claims, dependence on third parties for technology licenses, liability claims, defects in our software and solutions, our ability to protect our information technology infrastructure, international operations, changing government and tax regulations, stock price fluctuations, impairment of goodwill or intangible assets, realization of revenue from contracted sales, potential sales, backlog and deferred revenue, anti-takeover provisions, the restatement of prior period financial statements and our exploration of strategic alternatives. 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

Since 1978, Carreker Corporation has designed, developed, sold and delivered payments-related software and consulting solutions to financial institutions and financial service providers. More recently, we have introduced a business process outsourcing solution to our customers. Our products and services address a broad spectrum of payment activities and are designed to help our clients enhance the performance of their payments businesses; improve operational efficiency in payments processing; enhance revenue and profitability from payments-oriented products and services; reduce losses associated with fraudulent payment transactions; facilitate compliance with risk-related laws and regulations; and/or maximize clients’ customer income streams by aligning their customer interactions and products with customer needs. Carreker employed a total of ~~492~~495 employees at ~~July~~October 31, 2006.

We are organized into four business unit operating divisions: Global Payments Technologies (“GPT”), Revenue Enhancement (“RevE”), Global Payments Consulting (“GPC”) and a Business Process Outsourcing business which is delivered through a majority-owned subsidiary named Carretek LLC (“Carretek”) to address the payments outsourcing arena. These operating divisions are operated in distinct yet increasingly synergistic ways to bring value to our clients.

Global Payments Technologies. This division is responsible for design, development, sales, and support of our technology solutions. The division has three lines of business with distinct solution offerings: Risk solutions, Payments solutions and Cash & Logistics solutions. Revenue is primarily derived from license fees, implementation fees and maintenance fees. As of ~~July~~October 31,, 2006, GPT had 282 employees.

Revenue Enhancement. This highly specialized division provides consulting and software solutions focused on increasing clients’ revenue streams. Areas of expertise include fee income, market segmentation, management of customer price structures, account retention, account ~~acquisitions~~acquisition and profitability. A majority of the revenue generated by this division is through benefit-sharing agreements with our customers, recorded as consulting revenue along with license fees, maintenance fees and implementation fees from our CVE software offering. As of ~~July~~October 31,, 2006, RevE had 85 87 employees.

Global Payments Consulting. The objective of this professional services division is to provide our clients with “applied thought leadership” related to the business of payments. Revenue in the GPC division is primarily derived through the delivery of consulting services offered primarily on a time and materials basis to our clients, along with the license fees, maintenance fees and services fees associated with our Float Pricing System software offering and Payments Clearing Model product offering. As of ~~July~~October 31,, 2006, GPC had 23 22 employees.

Business Process Outsourcing. In fiscal 2003 we formed Carretek. Carretek is a transformational business outsourcer for information technology and payment and transaction processing jointly owned by Carreker Corporation and Majesco Software, Inc., the U.S. subsidiary of Mastek Limited, a leading Indian outsourcing company with global operations. As of ~~July~~October 31, 2006, 2 of the Company’s U.S. based employees and ~~119~~123 offshore personnel of Mastek Limited were seconded to Carretek on a contract basis.

Cost of Revenues and Gross Margins. We strive to control our cost of revenues and thereby maintain or improve our gross margins. The major items impacting cost of consulting, cost of software maintenance and cost of software implementation are 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. As of ~~July~~October 31,, 2006, the Corporate Account Relationship Management and Marketing staff had 20 employees, and the Corporate staff which includes Executive Management, Legal, Finance and Accounting, Human Resources, Facilities and IT had 80 82 employees.

Liquidity and Cash Flows. Cash and cash equivalents at ~~July~~October 31, 2006 and January 31, 2006 totaled $~~27.6~~$24.2 million and $29.7 million, respectively. In addition, we had $~~5.9~~$13.0 million of marketable debt securities at ~~July~~October 31, 2006, as compared to $4.7 million at January 31, 2006. ~~At July 31, 2006 and January 31, 2006, there were no borrowings outstanding under our revolving credit agreement. Additionally, we~~We did not renew our revolving credit agreement which expired by its terms on July 31, 2006 as current cash on hand, marketable securities and our cash projected to be generated from operations are believed to be sufficient to meet our cash requirements for the foreseeable future.

Products and Services

The products and services of our primary operating divisions are described below in this sequence: Global Payments Technologies (“GPT”), Revenue Enhancement (“RevE”), Global Payments Consulting (“GPC”) and Business Process Outsourcing.

Global Payments Technologies. 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. GPT offers risk management solutions that mitigate depository account risk through profiling and advanced analytics technology. GPT risk management solutions leverage transaction monitoring and filtering capabilities for AML and OFAC compliance. Finally, we offer technology solutions that optimize the inventory management of a bank’s cash stock levels and logistical service requirements, including managing how much is needed, when it is needed and where it is needed. Our solutions reduce the amount of cash banks need to hold in reserve accounts and as cash-on-hand while ensuring a high level of customer service through timely replenishment of ATM cash supplies at minimal logistical services cost.

Specific solutions in the GPT group include:

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. Information management solution aggregates fraud source information and serves as a risk management dashboard. Multi-payment transaction monitoring solution uses advanced analytics and rules to detect suspicious activity.	FraudLink On-Us, FraudLink Deposit, FraudLink Deposit – Branch Access Option, Kite, FraudLink Positive Pay, FraudLink eTracker, FraudLink ACHeCK, FraudLink PC, Workflow Manager, AML Filter, Information Manager, Fraud Manager On-Us, Deposit, Wires, AML, and Fraud Solutions Consulting

Payment Solutions:

Exception Management	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)

Solution	Description	Products Offered

Check Image Capture	Products and services related to the centralized and distributed capture, quality and inspection assurance, storage and delivery of check images. Distributed capture solutions come in web-based thin client and thick client. Distributed capture branch solution serves as a core component to full bank branch image enablement.	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 Suite

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

~~Solution~~	~~Description~~	~~Products Offered~~

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”) and image quality and usability checking.	~~ExchgLink , IRD Create, IRD Author, Image Inspector, CheckLink, CheckLink PC, Deposit Manager, Branch Truncation Manager and Cnotes~~

	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 & Logistics 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, ATM Logix

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 enable automation and standardization of the cash ordering process, including the matching and reconciliation of invoices and the optimization of transportation. Consulting solutions can drive further efficiency and automation in vault, branch and ATM operations.	iCom, ReserveLink, Matchpoint and Currency Supply Chain Consulting

Solution	Description	Products Offered

Enterprise Tracking	An enterprise tracking solution designed to track any object or virtual item from origination to final destination. Ability to track accountable mail, branch bags, item volumes, ATM work, currency bags, incoming domestic and international deposits, customer tapes and much more. Web-based application with distributed deployment capabilities.	Receive Sentry, Trackpoint

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

Revenue Enhancement. Revenue Enhancement (“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 15 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 RevE offering is our CVE solutions that include software, proprietary sales management methodologies and sales training programs. Our CVE solutions assist financial institutions in leveraging central intelligence with local insight, translating strategy into specific actions to achieve sustained organizational performance. This enables our clients to improve their identification of those customers and prospects representing the greatest value or potential, while aligning internal processes and behaviors with management’s focus. Our approach is unique and complementary to many CRM investments that banks have made in recent years and is designed to focus their activities such that they can attain increased returns on these CRM investments.

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

·Enterprise payment rationalization (strategy through performance optimization)

·Transaction/payment transformation services (research, planning, process design, implementation support, etc.)

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

· Transaction clearing optimization solutions (transportation, float, clearing type, clearing partners and funds availability optimization)

·Consolidation and merger/integration planning

·Payment channel risk mitigation

·Image exchange planning

·Strategic Sourcing evaluation

·Issue Recovery Services

· Managed Services for Float management / clearing optimization

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

· Float Management software products – Float Pricing System, Payments Clearing Model and Float and Pricing Profitability ~~application–~~application – for managing and reporting a bank’s float profitability through analysis and pricing of workflow, check clearing operations and customer allocation methodologies. These products also provide critical activity summaries, aid in creating multiple availability and pricing schedules, and pinpoint the cost/profitability of transactions or relationships.

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

Business Process Outsourcing. Carretek LLC is a transformational business outsourcer for information technology, payment and transaction processing for financial institutions jointly owned by Carreker Corporation (51%) and Majesco Software Inc. (49%), the U.S. subsidiary of Mastek Limited, a leading Indian outsourcing company with global operations. Carretek was formed in fiscal 2003.

Carretek’s mission is to enable financial institutions and their processors to realize the benefits of transformational offshore-centric outsourcing (“offshoring”) of their information technology and 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

Comparison of Three Months Ended ~~July~~October 31, 2006 (“Q2Q3 2006”) to Three Months Ended ~~July~~October 31, 2005 (“Q2Q3 2005”) and ~~Six~~Nine Months Ended ~~July~~October 31, 2006 (“YTD 2006”) to ~~Six~~Nine Months Ended ~~July~~October 31, 2005 (“YTD 2005”)

Our consolidated revenues ~~declined $1.1 million,~~decreased $95,000, or ~~3.7%~~0.3%, to ~~$28.8~~$28.3 million in Q2Q3 2006 as compared to ~~$29.9~~$28.4 million in Q2Q3 2005, and our revenues declined ~~$2.1~~$2.2 million, or ~~3.6%~~2.5%, to ~~$56.0~~$84.3 million in YTD 2006 as compared to ~~$58.1~~$86.5 million in YTD 2005. Our net ~~income declined $93,000, or 8.8%,~~loss decreased $861,000 to ~~$961,000~~a net loss of $89,000 in Q2Q3 2006 as compared to ~~$1.1 million~~a net loss of $950,000 in Q2Q3 2005 and our net income ~~declined $625,000,~~increased $236,000, or ~~40.3%~~39.2%, to ~~$927,000~~$838,000 in YTD 2006 as compared to ~~$1.6 million~~$602,000 in YTD 2005.

The ~~decline~~decrease in our revenue on a quarterly basis was primarily the result of a decline in software license revenue within our GPT business segment which was almost completely offset by increased domestic contingent fee revenue associated with our RevE business ~~segment. Both~~segment, along with smaller revenue increases within both the ~~Q2 2006~~GPC and ~~YTD 2006 declines in revenue within RevE were centered in its traditional contingent fee based consulting revenues, particularly within its international markets.~~Business Processing Outsourcing business segments. The decline in ~~RevE revenues was partially offset by an increase in GPT business segment revenues. GPT’s increase in revenues in Q2 2006 and~~our revenue on a YTD ~~2006~~basis was primarily the result of ~~an increase~~declines in our international contingent fee revenue within our RevE business segment, along with a decline in software license revenue within ~~the Payments group.~~

~~The Payments group includes such products as Image Archive~~our GPT business segment. These revenue declines were partially offset by increased revenue within our GPC business segment and Exception Management applications as well as Source Capture, ExchgLink and Image Replacement Document (“IRD”) solutions. During Q2 2006, a single GPT customer expanded its licenses for both the Image Archive and IRD Author solutions. This expansion resulted in approximately $2.3 million of software license revenue in Q2 2006, and accounted for 41.4% and 28.2% of software license revenue in Q2 2006 and YTD 2006, respectively.also increased transaction volume within our Business Process Outsourcing business segment.

Our cost of revenues totaled $14.8 million in each of Q3 2006 and Q3 2005. On a YTD basis, our cost of revenues declined ~~on an absolute dollar basis $367,000,~~$216,000, or ~~2.5%~~0.5%, to ~~$14.1~~$43.1 million in Q2YTD 2006 as compared to ~~$14.5~~$43.4 million in ~~Q2 2005~~YTD 2005. With relatively flat revenue and ~~our~~ cost of revenues, ~~on an absolute dollar basis was relatively flat~~gross profit decreased slightly to 47.5% in Q3 2006 as compared to 47.8% in Q3 2005. Due to the decline in revenue in YTD 2006 as compared to YTD ~~2005. The decline in revenues, discussed above, lowered our~~2005, gross profit percentage declined to ~~51.1% in Q2 2006~~48.8% as compared to ~~51.7% in Q2 2005 and 49.5% in YTD 2006 as compared to 50.9% in YTD 2005.~~49.9%, respectively.

Total operating expenses declined ~~$261,000,~~$809,000, or ~~1.8%~~5.5%, to ~~$14.2~~$14.0 million in Q2Q3 2006 as compared to ~~$14.5~~$14.8 million in Q2Q3 2005, and operating expenses declined ~~$796,000,~~$1.6 million, or ~~2.8%~~3.7%, to ~~$27.6~~$41.5 million in YTD 2006 as compared to ~~$28.4~~$43.1 million in YTD 2005. ~~There were slight~~On a quarterly basis, the decline in total operating costs and expenses was primarily associated with a $780,000 restructuring charge which related to the severance and other personnel costs for 29 employees terminated in Q3 2005 primarily within the GPT business segment. On a YTD basis, the decline in operating costs and expenses was primarily associated with a $903,000 decline in restructuring and other charges, along with lesser declines in both selling, general and administrative ~~expenses~~costs and research and development ~~expenses and there have been no restructuring and other charges recorded to date in fiscal 2006, which compares to $28,000 in Q2 2005 and $123,000 in YTD 2005.~~costs.

Cash and cash equivalents, ~~decreased~~along with marketable securities, increased to ~~$27.6~~$37.2 million at October 31, 2006 which is an increase of $3.7 million and $2.8 million as compared to July 31, 2006 ~~reflecting a decrease of $7.2 million from the end of Q1~~and January 31, 2006, but only a decrease of $2.1 million on a YTD basis. This decrease was primarily the result of increased accounts receivable, particularly within the RevE business segment in which several large contracts recorded in the first six months of fiscal 2006 contain payment terms which extend into the latter half of fiscal 2006.respectively.

~~We continue to anticipate revenue growth during the second half of the 2006 fiscal year relative to the first half of fiscal 2006.~~

We expect that revenue and net income for the third quarter of fiscalQ4 2006 will be roughly in line with the secondhighest of any quarter of the 2006 andfiscal year though the increase is not expected to be significant enough for us to achieve the 9 to 16% Income from Operations goal that we will achieve improved revenue and net incomehad previously set for Q4 2006. We anticipate achieving the target operating range in fiscal 2007. Full year revenue for fiscal 2006 asis expected to be relatively flat compared to fiscal 2005.2005 but with improved profitability. We also believe that we are well positionedexpect year over year sales backlog growth, which combined with current sales activity will position us for revenue growth and improved profitability in fiscal 2007 as a result of anticipated revenue growth, improved operating leverage, and the decrease in scheduled amortization expense associated with certain acquisition-related intangible assets.

2007.

Results of Operations

Revenues

Revenues by Segment ($ in thousands):

	Three Months Ended July 31,				Variance					Six Months Ended July 31,				Variance					Three Months Ended October 31,				Variance					Nine Months Ended October 31,				Variance
	2006		2005		$			%		2006		2005		$			%		2006		2005		$			%		2006		2005		$			%

Revenue Enhancement	$	7,353	$	10,897	$	(3,544	)	(32.5	)%	$	15,951	$	19,896	$	(3,945	)	(19.8	)%	$	8,889	$	8,029	$	860		10.7	%	$	24,840	$	27,925	$	(3,085	)	(11.0	)%
Global Payments Technologies	19,902		17,481		2,421			13.8		36,120		35,449		671			1.9		17,415		19,048		(1,633		)	(8.6	)	53,534		54,497		(963		)	(1.8	)
Global Payments Consulting	1,018		1,301		(283		)	(21.8	)	2,937		2,275		662			29.1		1,460		1,073		387			36.1		4,398		3,348		1,050			31.4
Business Process Outsourcing	530		241		289			119.9		1,040		498		542			108.8		511		220		291			132.3		1,551		718		833			116.0

Total Revenues	$	28,803	$	29,920	$	(1,117	)	(3.7	)%	$	56,048	$	58,118	$	(2,070	)	(3.6	)%	$	28,275	$	28,370	$	(95	)	(0.3	)%	$	84,323	$	86,488	$	(2,165	)	(2.5	)%

Overall, total revenue ~~declined $1.1 million,~~decreased $95,000, or ~~3.7%~~0.3%, to ~~$28.8~~$28.3 million in Q2Q3 2006 as compared to ~~$29.9~~$28.4 million in Q2Q3 2005 and total revenue declined ~~$2.1~~$2.2 million, or ~~3.6%~~2.5%, to ~~$56.0~~$84.3 million in YTD 2006 as compared to ~~$58.1~~$86.5 million in YTD 2005. ~~The decline on both a quarterly and YTD basis is centered within the RevE business segment.~~

Our RevE segment revenues ~~declined $3.5 million,~~increased $860,000, or ~~32.5%~~10.7%, on a quarterly basis and ~~$3.9~~has declined $3.1 million, or ~~19.8%~~11.0%, on a YTD basis. RevE’s traditional contingent consulting revenues ~~declined $2.6~~increased $1.6 million, or ~~29.2%~~25.6%, on a quarterly basis and ~~$2.8~~declined $1.2 million, or ~~16.8%~~5.0%, on a YTD basis. ~~There were 15~~The increase in revenue ~~producing~~is primarily the result of an increase in domestic consulting ~~engagements~~revenue in Q3 2006. The decline on a YTD basis is primarily the result of lower sales activity during fiscal 2005 in both ~~Q2 2006~~our domestic and ~~Q2 2005 and 17 revenue producing consulting engagements in YTD 2006 and YTD 2005. RevE did not derive any consulting revenue from its~~ international ~~customers in~~markets, which negatively impacted the first ~~six months~~two quarters of fiscal 2006 which compares to $3.9 million in the first six months of fiscal 2005. However, RevE is in the early phases of several international engagements in which the consulting revenue has yet to be realized.revenues. In Q2Q3 2006, approximately ~~$2.8~~$3.2 million, or ~~38.7%~~35.5%, and in YTD 2006 approximately ~~$8.0~~$8.2 million, or ~~50.4%~~33.0%, of RevE’s total revenue was derived from a single consulting ~~engagement that should be completed in early Q3 2006.~~engagement. Additionally, the software license, maintenance, implementation and other services revenue derived from RevE’s CVE proprietary sales management offering declined approximately ~~$801,000,~~$790,000, or ~~50.7%~~59.3%, to ~~$779,000~~$543,000 in Q2Q3 2006 as compared to ~~$1.6~~$1.3 million in Q2Q3 2005 and declined approximately ~~$882,000,~~$1.7 million, or ~~35.7%~~44.0%, to ~~$1.6~~$2.1 million in YTD 2006 as compared to ~~$2.5~~$3.8 million in YTD 2005, ~~as the number of~~due primarily to a decline in active ~~engagements declined from 3 to 2.~~engagements.

~~The increase in~~Our GPT segment revenue declined on ~~both~~ a quarterly ~~and YTD~~ basis, is primarily as the result of decreased software license revenue within all three of GPT’s primary solution groups of Payments, Cash and Risk. These declines were partially offset by increased maintenance revenue, particularly within the Payments solutions group. On a YTD basis, the decline in revenue is primarily related to a decrease in software license revenue within our Cash and Risk solutions groups; however, this decline was partially offset by an increase in software license revenue within the Payments solutions ~~offerings.~~group. In Q2 2006, a single GPT customer expanded its license for both the Check Image Archive and IRD Author ~~solutions.~~solutions within the Payment Solutions group. The expansion resulted in approximately $2.3 million of software license revenue in Q2 2006. ~~This transaction accounted for 11.4% and 6.3% of GPT’s total~~

Our GPC segment revenue ~~in Q2 2006~~increased on both a quarterly and YTD ~~2006, respectively.~~

~~GPC’s revenue decline in Q2 2006 as compared to Q2 2005 was primarily the result of decreased consulting revenue.~~basis. GPC has intensified its sales focus as we completed the repositioning of this business to focus on enterprise-wide payment electronification strategies, image enablement planning and integration and risk mitigation. The ~~quarterly consulting~~primarily driver of the increased revenue ~~decrease can be attributed~~was related to fluctuations in the timing of certain engagements. On a YTD basis, all revenue categories within GPC have increased in YTD 2006 as compared to YTD 2005. The largest increases are within software license and software implementation and other services revenue, due primarily to our introduction of a new Payments Financial Modeling application and, with a rise in interest rates, renewed demand for our Float Management ~~products.~~related consulting software and services solutions. The demand for these products and services has increased due to the rise in interest rates, along with the introduction of new managed Float service offerings. Additionally, GPC introduced a new Payments Modeling application in fiscal 2006.

Our outsourcing revenue is derived through Carretek, our 51% owned business which offers outsourcing for information technology and payment and transaction processing. Carretek was formed in fiscal 2003 and signed its first customer agreement in the second quarter of fiscal 2004. In 2005 and 2006, we increased staffing under our initial contract and expanded our scope with this single customer to include a second and third set of transaction processing functions which has significantly increased revenue on both a quarterly and YTD basis in fiscal 2006 as compared to fiscal 2005. Future outsourcing revenue growth is contingent on increasing our scope with our existing customer or closing contracts with additional customers.

Consulting ($ in thousands):

Three Months Ended
July 31,

Variance

Six Months Ended
July 31,

Variance

2006

2005

$

%

2006

2005

$

%

Consulting

$6,839

$9,502

$(2,663
)
(28.0
)%
$15,397

$17,820

$(2,423
)
(13.6
)%

	Three Months Ended October 31,				Variance				Nine Months Ended October 31,				Variance
	2006		2005		$		%		2006		2005		$			%

Consulting	$	8,939	$	6,720	$	2,219	33.0	%	$	24,336	$	24,540	$	(204	)	(0.8	)%

Most of our consulting revenues are derived from our RevE business segment. Consulting revenues derived from our RevE segment ~~declined $2.6~~increased $1.6 million, or ~~29.2%~~25.6%, to ~~$6.3~~$8.0 million in Q2Q3 2006 as compared to ~~$8.8~~$6.4 million in Q2Q3 2005, and declined ~~$2.8~~$1.2 million, or ~~16.8%~~5.0%, to ~~$13.8~~$21.8 million in YTD 2006 as compared to ~~$16.6~~$22.9 million in YTD 2005. Within RevE, we continue to focus on maximizing the value to our existing customer base while expanding our expertise to new customers, both domestically and internationally. ~~There were no revenue producing international consulting engagements in Q2 2006 and YTD 2006 as compared to $2.1 million in Q2 2005 and $3.9 million in YTD 2006. However,~~ RevE is in the early phases of several large, long-term international engagements in which the consulting revenue has yet to be realized. Additionally, 45.5% of RevE’s consulting revenue in Q2 2006 and 58.3% in YTD 2006 was derived from one customer. This compares to 45.2% or RevE’s consulting revenue in Q2 2005 and 24.2% in YTD 2005 derived from one customer.

Consulting revenues derived from our GPC segment ~~declined $201,000,~~increased $492,000, or ~~30.1%~~141.0%, to ~~$467,000~~$841,000 in Q2Q3 2006 as compared to ~~$668,000~~$349,000 in Q2Q3 2005, and increased ~~$152,000,~~$645,000, or ~~12.5%~~41.3%, to ~~$1.4~~$2.2 million in YTD 2006 as compared to ~~$1.2~~$1.6 million in YTD 2005. ~~Beginning in Q4 2005~~The increase can be attributed to renewed demand for our Float Management related consulting and ~~carrying over into Q1 2006, the number and size of GPC consulting engagements increased; however, several of these engagements concluded early in Q2 2006.~~service offerings.

Software License ($ in thousands):

Three Months Ended
July 31,

Variance

Six Months Ended
July 31,

Variance

2006

2005

$

%

2006

2005

$

%

Software License

$
5,493

$
3,782

$
1,711

45.2
%
$
8,050

$
7,141

$
909

12.7
%

	Three Months Ended October 31,				Variance					Nine Months Ended October 31,				Variance
	2006		2005		$			%		2006		2005		$			%

Software License	$	2,864	$	5,322	$	(2,458	)	(46.2	)%	$	10,914	$	12,463	$	(1,549	)	(12.4	)%

Most of our software license revenues are derived from our GPT business segment. Software license revenues from our GPT business segment ~~increased $2.0~~declined $2.3 million, or ~~58.0%~~45.4%, to ~~$5.4~~$2.8 million in Q2Q3 2006 as compared to ~~$3.4~~$5.1 million in Q2Q3 2005, and ~~increased $1.0~~declined $1.2 million, or ~~16.3%~~10.7%, to ~~$7.5~~$10.3 million in YTD 2006 as compared to ~~$6.5~~$11.5 million in YTD 2005.

Within GPT, the quarterly software license ~~increase is within the Payment Solutions~~decrease was spread among all three solutions: Payments, Cash and Risk. Within our Payments solutions suite of products, especially those products which ~~includes products~~were designed to address Check Image Exchange made possible by the Check 21 ~~legislation. Check 21 permits U.S. banks~~legislation, we have continued to ~~accept digital images~~have isolated success with several of ~~checks the same way that they accept a paper check. We~~our key customers since these products were introduced in fiscal 2004 and fiscal 2005; new remote deposit capture products designed for branch, corporate and ATM deposits have been introduced in fiscal 2006. While our sales prospects have increased in fiscal 2006, sales closure and revenue recognition have taken longer than expected. Both Cash and Risk have recently introduced several new ~~Payment solution products to compete in this space~~product offerings, such as ~~ExchgLink,~~Matchpoint, Trackpoint and Fraud Manager, and have had relatively good success within their markets; however, because of our ~~solution~~accounting policies for ~~exchanging images~~new products, along with ~~other banks, IRD Author which generates~~contractual terms, the software revenue from these products is deferred until the products are accepted by the customers. On a YTD basis, the software license decreases within Cash and processes substitute checks often referred to as image replacement documents (“IRD”), Image Inspector which ensures image quality and, finally, Source Capture which allows customers to capture deposits at branches, ATM’s and bank customer sites. Delayed industry adoption rates and intensified competitionRisk have ~~dampened results relative to our expectations; however,~~been partially offset by an increase in Payments related software license revenue. In Q2 2006, a single GPT customer expanded its license for both the Check Image Archive and IRD Author ~~solutions.~~solutions within the Payment Solutions group. This expansion resulted in approximately $2.3 million of software license revenue in Q2 2006 as no software implementation or other services were required. ~~This transaction accounted for 42.1% of GPT’s software license revenue in Q2 2006 and 30.2% for YTD 2006.~~

The GPC business segment software license revenues ~~decreased $87,000, or 75.7%, to $28,000~~were flat in Q2Q3 2006 as compared to ~~$115,000 in Q2~~Q3 2005 and increased ~~$156,000,~~$158,000, or ~~135.6%~~107.5%, to ~~$271,000~~$305,000 in YTD 2006 as compared to ~~$115,000~~$147,000 in YTD 2005. The YTD increase is primarily due to the introduction of a new Payments ~~Financial~~ Modeling application and renewed demand for ~~its~~our Float Management products.

The software license revenue derived from our CVE product offering within our RevE business segment declined ~~$183,000,~~$163,000, or ~~72.6%~~69.4%, to ~~$69,000~~$72,000 in Q2Q3 2006 as compared to ~~$252,000~~$235,000 in Q2Q3 2005, and declined ~~$305,000,~~$468,000, or ~~55.2%~~59.4%, to ~~$248,000~~$320,000 in YTD 2006 as compared to ~~$553,000~~$788,000 in YTD 2005. This decline is the result of less active engagements; however, RevE’s strategy changed in fiscal 2006 to focus less on marketing CVE’s traditional software licenses and putting more emphasis on its consulting and other services, such as training. ~~This~~We believe this change in strategy ~~has led~~will lead to an expansion of our overall CVE ~~services for an existing customer and a pilot project for a new customer.~~offering revenues in the future.

Software Maintenance ($ in thousands):

Three Months Ended
July 31,

Variance

Six Months Ended
July 31,

Variance

2006

2005

$

%

2006

2005

$

%

Software Maintenance

$10,899

$10,576

$323

3.1
%
$21,651

$21,888

$(237
)
(1.1
)%

	Three Months Ended October 31,				Variance				Nine Months Ended October 31,				Variance
	2006		2005		$		%		2006		2005		$		%

Software Maintenance	$	11,198	$	10,822	$	376	3.5	%	$	32,849	$	32,710	$	139	0.4	%

As with software license fees, most of our maintenance fees are derived from our GPT business segment. Software maintenance fees are paid pursuant to annually renewable product and telephone support agreements with our software customers. The annual maintenance fee is generally paid by the customer at the beginning of the maintenance period and we recognize this maintenance revenue ratably over the term of the related contract. If the annual maintenance fee is not paid at the beginning of the maintenance period, we defer revenue recognition until the time that the maintenance fee is collected. When the payment is received, maintenance revenue is recognized for the period that maintenance revenue was previously deferred. Also, maintenance contracts usually carry annual maintenance fee escalation clauses typically based on an index, such as the consumer price index. Because our revenue recognition policy requires the collection of cash before revenue can begin to be recognized, our software maintenance revenue will fluctuate quarter-to-quarter. For our GPT business segment, one large customer did not pay the maintenance renewal by April 30, 2006 and this resulted in the deferral of approximately $374,000. This renewal was paid in Q2 2006 and the previously deferred maintenance revenue was recognized. Typically, our software maintenance revenue fluctuates between $10.0 million and $11.0 million per quarter.

Software Implementation and Other Services ($ in thousands):

Three Months Ended
July 31,

Variance

Six Months Ended
July 31,

Variance

2006

2005

$

%

2006

2005

$

%

Software Implementation and Other Services

$
4,249

$
4,892

$
(643
)
(13.1
)%
$
8,384

$
9,026

$
(642
)
(7.1
)%

	Three Months Ended October 31,				Variance					Nine Months Ended October 31,				Variance
	2006		2005		$			%		2006		2005		$			%

Software Implementation and Other Services	$	3,876	$	4,585	$	(709	)	(15.5	)%	$	12,260	$	13,611	$	(1,351	)	(9.9	)%

In the majority of our software customer arrangements, installation services are provided to the customer. Most of our software implementation fees are derived from our GPT business segment. The software implementation and other services revenue derived from GPT declined ~~$124,000,~~$169,000, or ~~3.5%~~5.0%, to $3.2 million in Q3 2006 as compared to $3.4 million in ~~Q2 2006 as compared to $3.5 million in Q2~~Q3 2005, and declined ~~$468,000,~~$637,000, or ~~6.6%~~6.1%, to ~~$6.6~~$9.8 million in YTD 2006 as compared to ~~$7.1~~$10.4 million in YTD 2005. ~~This~~The decline within GPT, on both a quarterly and YTD basis, was primarily within the ~~Risk and Cash~~Payments product offerings offset by ~~a slight increase~~increases within ~~the Payments~~both Cash and Risk product ~~offerings. This decline within Risk and Cash is primarily the result of lower software license revenue as both product groups are introducing new and/or enhanced product~~ offerings ~~to their respective markets. On a YTD basis, the decline is within the Payments product offerings.~~

RevE’s CVE software implementation and other services declined ~~$535,000,~~$417,000, or ~~45.5%~~51.4%, to ~~$641,000~~$394,000 in Q2Q3 2006 as compared to ~~$1.2 million~~$811,000 in Q2Q3 2005, and declined ~~$476,000,~~$893,000, or ~~28.8%~~36.2%, to ~~$1.2~~$1.6 million in YTD 2006 as compared to ~~$1.7~~$2.5 million in YTD 2005. This decline is related to fewer CVE revenue producing engagements and CVE’s change in product strategy discussed under “Software License” above.

GPC’s software implementation and other services revenue was relatively flat ~~at approximately $200,000 in~~on both ~~Q2 2006~~a quarterly and ~~2005, respectively. However, GPC’s software implementation and other services revenue increased $302,000, or 100.0%, to $604,000 in~~ YTD ~~2006 as compared to $302,000 in YTD 2005. This increase is the result of increased software license revenue described above.~~basis.

Outsourcing Services ($ in thousands):

Three Months Ended
July 31,

Variance

Six Months Ended
July 31,

Variance

2006

2005

$

%

2006

2005

$

%

Outsourcing Services

$
530

$
241

$
289

119.9
%
$
1,040

$
498

$
542

108.8
%

	Three Months Ended October 31,				Variance				Nine Months Ended October 31,				Variance
	2006		2005		$		%		2006		2005		$		%

Outsourcing Services	$	511	$	220	$	291	132.3	%	$	1,551	$	718	$	833	116.0	%

Our outsourcing service revenue is derived through Carretek, our 51% owned business which outsources information technology and payment and transaction processing. Carretek was formed in fiscal 2003 and signed its first agreement in the second quarter of fiscal 2004. In fiscal 2005, we expanded our scope of business with this customer to include a second and third set of transaction processing functions which resulted in increased revenue in fiscal 2006. While we continue to pursue opportunities to expand the scope of the services we provide to our existing customer, we do not expect significant growth on an absolute dollar basis until additional outsourcing customers are obtained.

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

Three Months Ended
July 31,

Variance

Six Months Ended
July 31,

Variance

2006

2005

$

%

2006

2005

$

%

Out-of-Pocket Expense Reimbursements

$
793

$
927

$
(134
)
(14.5
)%
$
1,526

$
1,745

$
(219
)
(12.6
)%

	Three Months Ended October 31,				Variance				Nine Months Ended October 31,				Variance
	2006		2005		$		%		2006		2005		$			%

Out-of-Pocket Expense Reimbursements	$	887	$	701	$	186	26.5	%	$	2,413	$	2,446	$	(33	)	(1.3	)%

These reimbursements tend to fluctuate period to period and the ~~decrease for both the~~increase in amount of out-of-pocket expense reimbursements on a quarterly ~~and YTD periods~~basis is primarily ~~related to reduced international travel~~the result of increased expenses within ~~the RevE~~our GPT business segment.

Cost of Revenues

Cost of Revenues by Segment ($ in thousands):

	Three Months Ended											Six Months Ended
	July 31,						Variance					July 31,						Variance					Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance
	2006			2005			$			%		2006			2005			$			%		2006			2005			$			%		2006			2005			$			%

Revenue Enhancement	$	4,903		$	4,911		$	(8	)	(0.2	)%	$	9,826		$	9,381		$	445		4.7	%	$	5,120		$	5,185		$	(65	)	(1.3	)%	$	14,946		$	14,566		$	380		2.6	%
% of revenue	66.7		%	45.1		%						61.6		%	47.2		%						57.6		%	64.6		%						60.2		%	52.2		%

Global Payments Technologies	$	7,913		$	8,248		$	(335	)	(4.1	)%	$	15,656		$	16,391		$	(735	)	(4.5	)%	$	8,370		$	8,303		$	67		0.8	%	$	24,026		$	24,694		$	(668	)	(2.7	)%
% of revenue	39.8		%	47.2		%						43.3		%	46.2		%						48.1		%	43.6		%						44.9		%	45.3		%

Global Payments Consulting	$	768		$	872		$	(104	)	(11.9	)%	$	1,836		$	1,774		$	62		3.5	%	$	930		$	887		$	43		4.8	%	$	2,766		$	2,661		$	105		3.9	%
% of revenue	75.4		%	67.0		%						62.5		%	78.0		%						63.7		%	82.7		%						62.9		%	79.5		%

Business Process Outsourcing	$	514		$	434		$	80		18.4	%	$	990		$	1,013		$	(23	)	(2.3	)%	$	414		$	424		$	(10	)	(2.4	)%	$	1,404		$	1,437		$	(33	)	(2.3	)%
% of revenue	97.0		%	180.1		%						95.2		%	203.4		%						81.0		%	192.7		%						90.5		%	200.1		%

Total Cost of Revenues	$	14,098		$	14,465		$	(367	)	(2.5	)%	$	28,308		$	28,559		$	(251	)	(0.9	)%	$	14,834		$	14,799		$	35		0.2	%	$	43,142		$	43,358		$	(216	)	(0.5	)%
% of revenue	48.9		%	48.3		%						50.5		%	49.1		%						52.5		%	52.2		%						51.2		%	50.1		%

In total and by business segment, cost of revenues on an absolute dollar basis remained relatively flat for Q2Q3 2006 and YTD 2006 as compared to Q2Q3 2005 and YTD 2005. The largest decline on a YTD basis was within GPT and was primarily the result of GPT reducing its workforce by 2927 employees in Q3 2005. RevE’s cost of revenues increased on a YTD basis primarily within ~~the~~ cost of consulting, as this group changed its focus and strategy related to its CVE product offering discussed above.

~~With the~~On a quarterly basis, total revenues and total cost of revenues ~~being~~were relatively flat ~~on a quarterly basis,~~and correspondingly the ~~fluctuation in the~~total cost of revenues as a percentage of total ~~business segment~~ revenue was ~~primarily driven by~~also flat. On a YTD basis, the increase in the total cost of revenues as a percentage of total revenue ~~fluctuations within~~was the ~~respective business segments, with~~result of the overall decline in total revenue exceeding the decline in total cost of revenues.

Cost of Consulting ($ in thousands):

	Three Months Ended										Six Months Ended										Three Months Ended October 31,						Variance				Nine Months Ended October 31,						Variance
	July 31,						Variance				July 31,						Variance				2006			2005			$		%		2006			2005			$		%
	2006			2005			$		%		2006			2005			$		%
Cost of Consulting	$	4,798		$	4,277		$	521	12.2	%	$	9,670		$	8,518		$	1,152	13.5	%	$	5,154		$	4,369		$	785	18.0	%	$	14,824		$	12,887		$	1,937	15.0	%
% of consulting revenue	70.2		%	45.0		%					62.8		%	47.8		%					57.7		%	65.0		%					60.9		%	52.5		%

The cost of consulting consists primarily of personnel costs related to our consulting engagements within both our RevE and GPC business segments. The absolute dollar increase in the cost of consulting on a quarterly and YTD basis is the result of RevE’s change in focus and strategy for its CVE offering from traditional software license, software maintenance and software services offering to consulting benchmarking and training offerings. ~~The~~A 25.6% increase in traditional RevE consulting revenue in Q3 2006, as compared to Q3 2005, decreased the percentage of the cost of consulting as a percentage of consulting revenue in Q3 2006 as compared to Q3 2005; however, on a YTD basis, an increase in cost of consulting within RevE, without an increase in consulting revenue, has increased the cost of consulting as a percentage of consulting ~~revenue on both a quarterly and YTD basis.~~revenue.

Cost of Software Licenses ($ in thousands):

	Three Months Ended										Six Months Ended
	July 31,						Variance				July 31,						Variance				Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance
	2006			2005			$		%		2006			2005			$		%		2006			2005			$			%		2006			2005			$		%

Cost of Software Licenses	$	1,885		$	1,828		$	57	3.1	%	$	3,725		$	3,364		$	361	10.7	%	$	1,985		$	2,155		$	(170	)	(7.9	)%	$	5,710		$	5,519		$	191	3.5	%
% of software license revenue	34.3		%	48.3		%					46.3		%	47.1		%					69.3		%	40.5		%						52.3		%	44.3		%

The cost of software licenses consists principally of amortization of capitalized and acquired software costs along with royalties payable to third parties. The cost of software licenses was relatively flat on a quarterly basis and increased on a YTD basis primarily as the result of increased royalty expense due to product mix. The ~~large decrease~~increase in the cost of software licenses as a percentage of software license revenue, on both a quarterly and YTD basis, is attributed to the ~~large increase~~decline in software license revenue within GPT discussed above.

In connection with certain software license, maintenance and ~~certain~~ consulting agreements entered into with ~~certain~~some banks and purchase agreements with vendors under which we acquire 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 recognize royalty expense when the associated revenue is recognized. The royalty percentages generally range from 20% to ~~50%~~70% of the associated revenue. Approximately ~~$483,000~~$586,000 and ~~$462,000~~$569,000 of royalty expense was recorded under these agreements and charged to cost of software licenses in Q2Q3 2006 and Q2Q3 2005, respectively, and ~~$829,000~~$1.4 million and ~~$554,000~~$1.1 million in YTD 2006 and 2005, respectively. Depending on our future product mix, our margins from software license fees may be ~~negatively~~ impacted by ~~increased~~fluctuations in software royalty expense.

Cost of Software Maintenance ($ in thousands):

	Three Months Ended											Six Months Ended
	July 31,						Variance					July 31,						Variance					Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance
	2006			2005			$			%		2006			2005			$			%		2006			2005			$			%		2006			2005			$			%

Cost of Software Maintenance	$	3,189		$	3,436		$	(247	)	(7.2	)%	$	6,361		$	7,411		$	(1,050	)	(14.2	)%	$	3,154		$	3,588		$	(434	)	(12.1	)%	$	9,515		$	10,999		$	(1,484	)	(13.5	)%
% of software maintenance revenue	29.3		%	32.5		%						29.4		%	33.9		%						28.2		%	33.2		%						29.0		%	33.6		%

Cost of maintenance consists primarily of personnel and facility costs to provide telephone support, 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. These costs are primarily contained within our GPT business segment. The decline in costs of maintenance in absolute dollars on a quarterly and YTD basis is primarily the result of reduced personnel related costs and contract labor costs within the GPT business segment which was the result of the personnel reductions carried out at the beginning of Q3 2005.

The annual maintenance fee is generally paid by the customer at the beginning of the maintenance period and we recognize this maintenance revenue ratably over the term of the related contract. If the annual maintenance fee is not paid at the beginning of the maintenance period, we defer revenue recognition until the time that the maintenance fee is paid by the customer. When the payment is received, maintenance revenue is recognized for the period that maintenance revenue was previously deferred. As a result, our cost of software maintenance as a percentage of related maintenance revenue will fluctuate.

Cost of Software Implementation and Other Services ($ in thousands):

	Three Months Ended											Six Months Ended
	July 31,						Variance					July 31,						Variance					Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance
	2006			2005			$			%		2006			2005			$			%		2006			2005			$			%		2006			2005			$			%

Cost of Software Implementation and Other Services	$	2,938		$	3,682		$	(744	)	(20.2	)%	$	6,014		$	6,655		$	(641	)	(9.6	)%	$	3,167		$	3,562		$	(395	)	(11.1	)%	$	9,181		$	10,217		$	(1,036	)	(10.1	)%
% of software implementation and other services revenue	69.1		%	75.3		%						71.7		%	73.7		%						81.7		%	77.7		%						74.9		%	75.1		%

Cost of software implementation consists primarily of personnel and facility costs to provide software implementation and project management support to customer software implementations primarily within our GPT business segment and to a lesser degree our RevE business segment. The decline in the cost of software implementation and other services on both a quarterly and YTD basis was primarily the result of a decline in personnel costs within ~~both~~ our ~~GPT and~~ RevE business segments due to ~~reduced levels~~the redeployment of ~~software implementation and other services revenue in both business segments.~~CVE resources into consulting related activities.

Cost of Outsourcing ~~Service~~Services ($ in thousands):

	Three Months Ended										Six Months Ended										Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance
	July 31,						Variance				July 31,						Variance				2006			2005			$			%		2006			2005			$			%
	2006			2005			$		%		2006			2005			$		%

Cost of Outsourcing Service	$	514		$	434		$	80	18.4	%	$	990		$	1,013		$	(23)	(2.3	)%
Cost of Outsourcing Services																					$	414		$	424		$	(10	)	(2.4	)%	$	1,404		$	1,437		$	(33	)	(2.3	)%
% of outsourcing services revenue	97.0		%	180.1		%					95.2		%	203.4		%					81.0		%	192.7		%						90.5		%	200.1		%

The cost of outsourcing ~~service~~services relates to the operation of Carretek, our 51% owned business outsourcer for information technology and payment and transaction processing. To date, this business only has a single customer and our scope of business with this single customer includes outsourcing three business functions. The cost of outsourcing service on both a quarterly and YTD basis is relatively flat. The decline in the percentage of cost of outsourcing service as a percentage of outsourcing ~~service~~services revenue is primarily the result of increased revenue as two of the outsourced functions ramp up to full capacity on a relatively fixed cost structure.

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

	Three Months Ended											Six Months Ended
	July 31,						Variance					July 31,						Variance					Three Months Ended October 31,						Variance				Nine Months Ended October 31,						Variance
	2006			2005			$			%		2006			2005			$			%		2006			2005			$		%		2006			2005			$		%

Cost of Out-of-Pocket Expenses	$	774		$	808		$	(34	)	(4.2	)%	$	1,548		$	1,598		$	(50	)	(3.1	)%	$	960		$	701		$	259	36.9	%	$	2,508		$	2,299		$	209	9.1	%
% of out-of-pocket expense reimbursements	97.6		%	87.2		%						101.4		%	91.6		%						108.2		%	100.0		%					103.9		%	94.0		%

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 costs have remained relatively flat on both a quarterly and YTD basis. In addition, certain customer contracts contain expense maximums, so in certain cases not all expenses incurred can be passed along to the customer without contractual revisions or the customer’s express written approval, which can increase the volatility of the cost of out-of-pocket expense as a percentage of out-of-pocket expense reimbursements.

Operating Costs and Expenses:

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

	Three Months Ended July 31,						Variance					Six Months Ended July 31,						Variance					Three Months Ended October 31,						Variance					Nine Months Ended October 31,						Variance
	2006			2005			$			%		2006			2005			$			%		2006			2005			$			%		2006			2005			$			%

Selling, General and Administrative Expenses	$	11,423		$	11,593		$	(170	)	(1.5	)%	$	22,203		$	22,497		$	(294	)	(1.3	)%	$	11,087		$	11,191		$	(104	)	(0.9	)%	$	33,290		$	33,688		$	(398	)	(1.2	)%
% of total revenue	39.7		%	38.7		%						39.6		%	38.7		%						39.2		%	39.4		%						39.5		%	39.0		%

Selling, general and administrative expenses generally consist of personnel costs such as salaries, commissions and other incentive compensation along with travel associated with selling, marketing, general management and software management. Additionally, the provision for doubtful accounts, insurance, including directors and officers liability insurance, as well as professional services, such as legal and accounting expenses, and other related costs are classified within selling, general and administrative expense. Our selling, general and administrative expenses were essentially flat in absolute dollars on both a quarterly and YTD basis. However, there were significant changes within the underlying expense categories. Corporate sales and marketing expenses declined ~~$584,000~~$26,000 on a quarterly basis and $1.1 million on a YTD basis and our business segments also reduced their sales cost by ~~$735,000~~$573,000 on a quarterly basis and ~~$1.4~~$2.0 million on a YTD basis. These declines were primarily achieved through reduced personnel and personnel related costs. These cost reductions were offset by increased general and administrative costs of ~~$1.1 million~~$494,000 on a quarterly basis and ~~$2.2~~$2.7 million on a YTD basis. The increases in general and administrative costs consist of increased professional fees including legal fees arising out of lawsuits in which we are the plaintiff, and to a lesser extent, increased accounting and other professional fees related to the restatement of our financial statements that was announced in April 2006. Additionally, in Q1 2006, we began to expense stock-based compensation related to stock options and approximately ~~$212,000~~$249,000 on a quarterly basis and ~~$437,000~~$674,000 YTD 2006 was charged to general and administrative expense. ~~Finally, $347,000 of bonus expense was recorded within general and administrative expense in Q2 2006.~~

Selling, general and administrative costs as a percentage of total revenue decreased on a quarterly basis due to both a slight decline in selling, general and administrative expenses along with a slight increase in total revenue. Selling, general and administrative expense as a percentage of total revenue increased slightly on ~~both~~ a ~~quarterly and~~ YTD basis, primarily as ~~the~~a result of the decrease in revenue exceeding the decline in ~~total revenue in both periods.~~selling, general and administrative expenses.

Research and Development ($ in thousands):

	Three Months Ended July 31,						Variance					Six Months Ended July 31,						Variance					Three Months Ended October 31,						Variance				Nine Months Ended October 31,						Variance
	2006			2005			$			%		2006			2005			$			%		2006			2005			$		%		2006			2005			$			%

Research and Development Expenses	$	2,453		$	2,516		$	(63	)	(2.5	)%	$	4,658		$	5,037		$	(379	)	(7.5	)%	$	2,519		$	2,444		$	75	3.1	%	$	7,177		$	7,481		$	(304	)	(4.1	)%
% of total revenue	8.5		%	8.4		%						8.3		%	8.7		%						8.9		%	8.6		%					8.5		%	8.6		%

Research and development expenses consist primarily of personnel, contract labor, travel and facilities expenses. 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. The majority of research and development costs were related to new product development within our GPT ~~Payment Solutions group, although in Q2 2006 a new CVE offering within the RevE~~ business ~~segment reached technological feasibility and capitalization of development costs commenced.~~segment.

In accordance with SFAS No. 86, “Accounting for Costs of Software to be Sold, Leased or Otherwise Marketed,” we capitalized ~~$718,000~~$265,000 and ~~$271,000~~$0 in Q2Q3 2006 and Q2Q3 2005, respectively, and ~~$1.2~~$1.5 million and ~~$708,000~~$690,000 in YTD 2006 and YTD 2005, respectively. 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 through the process of creating a detailed program design and reviewing the detailed program design for any high risk development issues or through 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. At ~~July~~October 31, 2006, we had ~~seven~~four projects underway for which costs were capitalized in Q2Q3 2006. ~~Three~~Two of these projects are within Risk ~~solutions; three are within Cash & Logistics~~ solutions and ~~one is a CVE solution.~~two are RevE solutions. All current capitalized development projects are scheduled to be completed by the end of ~~fiscal 2006.~~Q1 2007.

Amortization of Customer Relationships: Amortization of customer relationships was $350,000 in both Q2Q3 2006 and Q2Q3 2005, and ~~$700,000~~$1.1 million for YTD 2006 and YTD 2005. The amortization results from the periodic recognition of amortization expense of intangible customer relationships acquired in the Check Solutions acquisition in fiscal 2001, and this amortization will continue until May 2007.

Restructuring and Other Charges: There were no restructuring and other charges recorded to date in fiscal 2006. However, in Q1 2005, we recorded $127,000 in restructuring and other charges, ~~during Q1 2005,~~ principally associated with the separation of ~~6 employees, and we recorded $28,000~~six employees. Additionally in ~~restructuring and other charges during Q2 2005, principally associated with the separation of 2 employees. In~~ Q1 2005, we also lowered our estimate by $32,000 for the costs associated with the discontinuance of one of our software offerings originally recorded in January 2004. In Q2 2005, we recorded $28,000 in restructuring and other charges, principally associated with the separation of 2 employees. Finally, in Q3 2005, we recorded $780,000 in restructuring and other charges, principally associated with the separation of 29 employees primarily within the GPT business segment.

The activity related to the accrued merger and restructuring costs to date in fiscal 2006 is as follows (in thousands):

	Workforce Reductions			CheckFlow Suite		Other		Total			Workforce Reductions			CheckFlow Suite		Other			Total

Reserve balance at January 31, 2006	$	87		$	200	$	47	$	334		$	87		$	200	$	47		$	334
Cash paid	(87		)	—		—		(87		)	(87		)	—		(35		)	(122		)
Reserve balance at April 30, 2006 and July 31, 2006	$	—		$	200	$	47	$	247
Reserve balance at October 31, 2006											$	—		$	200	$	12		$	212

We expect to complete these existing obligations by the end of fiscal 2006.

Other Income (Expense):

Interest Income ($ in thousands):

Three Months Ended
July 31,

Variance

Six Months Ended
July 31,

Variance

2006

2005

$

%

2006

2005

$

%

Interest Income

$
407

$
166

$
241

145.2
%
$
678

$
310

$
368

118.7
%

	Three Months Ended October 31,				Variance				Nine Months Ended October 31,				Variance
	2006		2005		$		%		2006		2005		$		%

Interest Income	$	392	$	185	$	207	111.9	%	$	1,070	$	495	$	575	116.2	%

Interest income consists of interest earned on marketable securities and cash and cash equivalents. The increase in interest income on both a quarterly and YTD basis is primarily the result of higher average invested balances in fiscal 2006 and higher yields on these investments.

Interest Expense ($ in thousands):

Three Months Ended
July 31,

Variance

Six Months Ended
July 31,

Variance

2006

2005

$

%

2006

2005

$

%

Interest Expense

$
(106
)
$
(107
)
$
(1
)
(0.9
)%
$
(211
)
$
(212
)
$
(1
)
(0.5
)%

	Three Months Ended October 31,				Variance					Nine Months Ended October 31,				Variance
	2006		2005		$			%		2006		2005		$			%

Interest Expense	$	—	$	122	$	(122	)	(100.0	)%	$	211	$	334	$	(123	)	(36.8	)%

Interest expense is primarily the result of the commitment fees associated with the maintenance of our $30.0 million revolving credit agreement. As discussed below in “Liquidity and Capital Resources,” we did not renew our credit facility following its expiration on July 31, 2006. Additionally, the amortization of the deferred loan costs is also included in interest expense and this amortization concluded on July 31, 2006. ~~There have been no borrowings outstanding under this credit agreement since Q1 2004.~~

Other income (expense) ($ in thousands):

	Three Months Ended July 31,						Variance					Six Months Ended July 31,						Variance					Three Months Ended October 31,					Variance					Nine Months Ended October 31,						Variance
	2006			2005			$			%		2006			2005			$			%		2006			2005		$			%		2006			2005			$			%

Minority share of net loss of Carretek LLC	194			213			(19		)	(8.9	)%	327			531			(203		)	(38.3	)%	150			269		(119		)	(44.2	)%	477			799			(322		)	(40.3	)%
Foreign exchange gains (losses)	123			(84		)	207			246.4	%	193			(101		)	294			291.1	%	(18		)	12		(30		)	250.0	%	175			(89		)	264			296.6	%
Other	(2		)	—			(2		)	—	%	(5		)	5			(11		)	(183.3	)%	2			2		—			—	%	(3		)	8			(11		)	(137.5	)%

Total	$	315		$	129		$	186		144.2	%	$	515		$	435		$	80		18.4	%	$	134		$	283	$	(149	)	(52.7	)%	$	649		$	718		$	(69	)	(9.6	)%

We own a 51% interest in Carretek LLC (“Carretek”), through which we offer financial institutions offshore-centric outsourcing of their business processes. Carretek ~~has~~ generated approximately ~~$368,000~~$307,000 and ~~$434,000 in~~$549,000 of losses in Q2Q3 2006 and Q2Q3 2005, respectively, and ~~$667,000~~$974,000 and ~~$1.1~~$1.6 million of losses in ~~losses~~ YTD 2006 and YTD ~~2005.~~2005, respectively. Accordingly, the 49% share inof these losses relating to the minority interest held by Majesco Software, Inc., or ~~$194,000~~$150,000 and ~~$213,000~~$269,000 in Q2Q3 2006 and Q2 2005, respectively, and ~~$327,000~~$477,000 and ~~$531,000~~$799,000 in YTD 2006 and 2005, respectively, was recorded in other income (expense). Foreign exchange gains and losses fluctuated primarily as the result of changing exchange rates and our mix of engagements denominated in a foreign currency.

Provision for Income Taxes: We have established a valuation allowance to reserve our net deferred tax assets at ~~July~~October 31, 2006 because of our inconsistent history of generating profitable operations and taxable income. The tax provision was computed based on actual results by jurisdiction, which resulted in a foreign tax provision of ~~$134,000~~$100,000 and $102,000 for the three months ended ~~July~~October 31, 2006 and 2005, respectively, and ~~$234,000~~$314,000 and ~~$183,000~~$270,000 for the ~~six~~nine months ended ~~July~~October 31, 2006 and 2005, respectively. In addition to the provision for foreign taxes, we recorded $20,000 and $15,000 of U.S. Federal and State tax expense in the ~~three and six~~nine months ended ~~July~~October 31, 2006 and 2005, respectively, for alternative minimum tax purposes.

4140

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

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



PART 1:		FINANCIAL INFORMATION

Item 1.		Financial Statements (unaudited)

		Condensed Consolidated Balance Sheets at ~~July~~October 31, 2006 and January 31, 2006

		Condensed Consolidated Statements of Operations for the three and ~~six~~nine months ended ~~July~~ October 31, 2006 and 2005

		Condensed Consolidated Statements of Stockholders’ Equity for the three and ~~six~~nine months ended ~~July~~October 31, 2006 and 2005

		Condensed Consolidated Statements of Cash Flows for the three and ~~six~~nine months ended ~~July~~ October 31, 2006 and 2005

		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 1A.		Risk Factors

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

FORM 10-Q

Results of Operations

PART II: OTHER INFORMATION

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

Operating leases	$	10,376	$	3,142	$	5,367	$	1,867	$	—
	$	10,376	$	3,142	$	5,367	$	1,867	$	—

Election of Directors	Shares For	Shares Withheld

J. Coley Clark	22,812,502	493,365
William C. Hammett, Jr.	22,813,568	492,299
Gregory B. Tomlinson	22,813,980	491,887

Proposal	Shares For	Shares Against	Abstentions

Ratification of accountants	23,217,991	84,180	3,696

Number		Exhibit Description

10.1		~~Board Representation~~Amended and Restated Employment Agreement dated ~~June 26,~~October 11, 2006 between the Company ~~Riley Investment Management LLC, SACC Partners LP,~~ and ~~Bryant R. Riley, (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on June 27, 2006)~~Suzette L. Massie

10.2		Amended and Restated Employment Agreement dated ~~May 19,~~October 11, 2006 between the Company and ~~John D. Carreker, III~~Lisa K. Peterson

10.3		First Amendment to Employment Agreement dated August 10, 2006 between the Company and John D. Carreker, III (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2006.)

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