S1 (SONE) 10-Q 2007 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2007

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                      to

Commission File Number: 000-24931

S1 CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	58-2395199
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
705 Westech Drive
Norcross, Georgia	30092
(Address of principal executive	(Zip Code)
offices)

Registrant’s Telephone Number, Including Area Code:(404) 923-3500

NOT APPLICABLE
(Former name if changed since last report.)

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. 

Large accelerated filero           Accelerated filerþ           Non-accelerated filero

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso Noþ

          Shares of common stock outstanding as of November 7, 2007: 58,000,272

S1 CORPORATION

QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

TABLE OF CONTENTS

 EX-31.1 SECTION 302 CERTIFICATION OF THE CEO

 EX-31.2 SECTION 302 CERTIFICATION OF THE CFO

 EX-32.1 SECTION 906 CERTIFICATION OF THE CEO

 EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

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PART 1 — FINANCIAL INFORMATION

Item 1 —Financial Statements

S1 CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

	September 30,			December 31,
	2007			2006
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	68,538		$	69,612
Short-term investments		3,014			21,392
Accounts receivable, net		48,071			53,371
Prepaid expenses		3,530			4,036
Other current assets		8,932			2,308
Total current assets		132,085			150,719
Property and equipment, net		19,889			12,137
Intangible assets, net		12,310			12,903
Goodwill, net		124,976			125,300
Other assets		5,790			6,746
Total assets	$	295,050		$	307,805
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,254		$	3,750
Accrued compensation and benefits		12,559			9,642
Accrued restructuring		5,851			9,092
Accrued other expenses		9,092			12,415
Deferred revenues		26,458			29,265
Current portion of debt obligation		3,288			3,328
Total current liabilities		60,502			67,492
Debt obligation, excluding current portion		8,541			4,119
Accrued restructuring, excluding current portion		6,328			10,386
Other liabilities		3,867			1,579
Total liabilities		79,238			83,576
Stockholders’ equity:
Preferred stock		10,000			10,000
Common stock		584			613
Additional paid in capital		1,823,725			1,845,529
Accumulated deficit		(1,616,238	)		(1,629,302	)
Accumulated other comprehensive loss:
Net loss on derivative financial instruments		(129	)		(168	)
Cumulative foreign currency translation adjustment		(2,130	)		(2,443	)
Total stockholders’ equity		215,812			224,229
Total liabilities and stockholders’ equity	$	295,050		$	307,805
Preferred shares issued and outstanding		749,064			749,064
Common shares issued and outstanding		58,420,853			61,290,973

See accompanying notes to unaudited condensed consolidated financial statements.

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S1 CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Revenues:
Software licenses	$	8,291		$	10,508		$	21,808		$	22,920
Support and maintenance		11,695			11,120			33,397			32,974
Professional services		19,426			18,355			60,539			49,926
Data center		11,647			11,616			35,077			35,113
Other		255			297			657			1,142
Total revenues		51,314			51,896			151,478			142,075
Operating expenses:
Cost of software licenses		975			1,128			2,807			3,220
Cost of professional services, support and maintenance		16,135			17,385			47,077			47,836
Cost of data center		6,333			5,713			18,522			16,888
Cost of other revenue		34			244			306			693
Selling and marketing		7,979			7,155			23,144			19,713
Product development		7,220			9,516			20,912			28,999
General and administrative		6,339			7,085			20,748			19,280
Restructuring costs		—			400			—			1,282
Depreciation		1,611			2,074			5,182			5,797
Amortization of other intangible assets		282			327			892			981
Total operating expenses		46,908			51,027			139,590			144,689
Operating income (loss)		4,406			869			11,888			(2,614	)
Interest and other income, net		855			1,277			2,510			3,526
Income before continuing operations		5,261			2,146			14,398			912
Income tax expense		(113	)		(253	)		(1,334	)		(907	)
Income from continuing operations		5,148			1,893			13,064			5
Income from discontinued operations, net of tax		—			31,452			—			30,785
Net income	$	5,148		$	33,345		$	13,064		$	30,790
Basic earnings per share
Continuing operations	$	0.09		$	0.03		$	0.21		$	—
Discontinued operations	$	—		$	0.43		$	—		$	0.43
Net income per share	$	0.09		$	0.46		$	0.21		$	0.43
Diluted earnings per share
Continuing operations	$	0.08		$	0.03		$	0.21		$	—
Discontinued operations	$	—		$	0.43		$	—		$	0.43
Net income per share	$	0.08		$	0.46		$	0.21		$	0.43
Weighted average common shares outstanding — basic		58,718,077			71,007,675			60,439,490			70,798,519
Weighted average common shares outstanding — fully diluted		59,966,505			71,161,983			61,289,708			70,987,628

See accompanying notes to unaudited condensed consolidated financial statements.

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S1 CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)
(Unaudited)

	Nine Months Ended
	September 30,
	2007			2006
Cash flows from operating activities:
Net income	$	13,064		$	30,790
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		8,224			9,555
Gain on disposal of discontinued operations, net of tax		—			(32,817	)
Provision for doubtful accounts receivable and billing adjustments		37			897
Stock based compensation expense		7,902			3,899
Changes in assets and liabilities:
Decrease (increase) in accounts receivable		5,130			(12,664	)
(Increase) decrease in prepaid expenses and other assets		(3,485	)		506
(Decrease) increase in accounts payable		(629	)		25
Decrease in accrued expenses and other liabilities		(10,010	)		(10,276	)
(Decrease) increase in deferred revenues		(2,340	)		7,001
Net cash provided by (used in) operating activities		17,893			(3,084	)
Cash flows from investing activities:
Cash paid in connection with acquisition		—			(14,000	)
Proceeds from sale of subsidiaries		—			32,639
Maturities of short-term investment securities		29,255			41,600
Purchases of short-term investment securities		(10,877	)		(23,439	)
Amounts held in escrow related to sale of business		—			(3,500	)
Amounts held in escrow related to property		(1,638	)		—
Purchases of property, equipment and technology		(8,384	)		(5,169	)
Net cash provided by investing activities		8,356			28,131
Cash flows from financing activities:
Proceeds from exercise of employee stock options		9,990			2,543
Payments on capital leases and debt obligations		(2,617	)		(1,856	)
Repurchase of common stock		(35,275	)		—
Proceeds from sale-lease back transaction		—			2,502
Net cash (used in) provided by financing activities		(27,902	)		3,189
Effect of exchange rate changes on cash and cash equivalents		579			(116	)
Net (decrease) increase in cash and cash equivalents		(1,074	)		28,120
Cash and cash equivalents at beginning of period		69,612			85,108
Cash and cash equivalents at end of period	$	68,538		$	113,228
Noncash investing and financing activities:
Equipment financed through capital leases	$	1,761		$	6,616
Property financed through notes payable	$	5,238		$	—

See accompanying notes to unaudited condensed consolidated financial statements.

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S1 CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     1. BACKGROUND AND BASIS OF PRESENTATION

          S1 Corporation (“S1”) is a global provider of software solutions for financial organizations including banks, credit unions and insurance companies. We operate and manage S1 in two business segments: Enterprise and Postilion. The Enterprise segment represents global banking and insurance solutions primarily targeting larger financial institutions. The Postilion segment represents the community financial, full service banking and lending businesses in North America, and global ATM/payments business.

          We sell our solutions primarily to traditional financial services providers, such as banks and insurance companies, as well as transaction processors and large retailers. Our solutions address the needs of small, mid-sized and large organizations. We derive a significant portion of our revenues from licensing our solutions and providing professional services. We generate recurring revenue from support and maintenance as well as revenue related to hosting applications and electronic bill payment services in our data center. We also generate recurring revenues by charging our customers a periodic fee for term licenses including the right-to-use the software and receive maintenance and support for a specified period of time. For certain customers, this fee includes the right to receive hosting services. In discussions with our customers and investors, we use the word “subscription” as being synonymous with a term license. Subscription license revenue is recognized evenly over the term of the contract which is typically between 12 and 60 months, whereas perpetual license revenue is generally recognized upon execution of the contract and delivery or on a percentage of completion basis over the installation period. Subscription or term licenses combine the right to use the licensed software and the right to receive support and maintenance and unspecified enhancements and in some cases, hosting services, into one periodic fee and typically do not transfer the rights to the software to the customer at the end of the contract term.

          Our Enterprise segment supports channels a bank uses to interact with its customers, including self service channels like the internet for personal, business and corporate online banking and trade finance, and full service channels such as teller, branch and call center. We previously licensed the Enterprise suite of products on both a perpetual and subscription basis but, beginning in the fourth quarter of 2006, Enterprise products are primarily offered on a perpetual license basis. With the focus on selling perpetual licenses for our Enterprise products going forward, license revenues may fluctuate in any given period depending on the amount, timing and nature of customer licensing activity. In some instances, we saw that our announcement in 2006 regarding the exploration of strategic alternatives discouraged some customers from entering into contracts with us. As a result, following the conclusion of our strategic assessment, we expect our licensing activity to increase. However, given that the sales cycle for large financial institutions generally lasts from six to eighteen months, we expect this increase to be gradual.

          In the community bank and credit union market, our Postilion segment provides online personal and business internet banking, telephone banking, and full service banking applications including teller, sales and service activities including new account opening and the call center agent’s desktop applications. In addition, our Postilion segment includes our payments business which offers software that drives automated teller machines (ATM) and point-of-sale (POS) devices to customers of all sizes around the world. We license our Postilion suite of online and telephone banking applications primarily on a subscription basis. Postilion’s ATM and POS applications and full service banking products are primarily licensed on a perpetual basis.

          In September 2007, we entered into a source code license agreement with a third party for mobile phone banking software. We intend to market this technology with both our Enterprise and Postilion products.

          We sell our solutions to small, mid-sized and large financial and retail organizations in two geographic regions: (i) Americas and (ii) International. Additional information about our business, geographic disclosures and major customers is presented in the Note 11 to our condensed consolidated financial statements in this report. We have approximately 3,000 financial institution customers, the majority of which are located in the United States.

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          We are headquartered in Norcross, Georgia, USA, with domestic offices in Littleton, Massachusetts; Charlotte, North Carolina; Austin, Texas; Fairport, New York; Colorado Springs, Colorado; and West Hills, California; and international offices in Brussels, Cape Town, Dubai, Dublin, Johannesburg, Melbourne, Munich, Pune, Chertsey and Singapore. We are incorporated in Delaware.

          We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006. In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of our financial condition as of September 30, 2007 and our results of operations for the three and nine months ended September 30, 2007 and cash flows for the nine months ended September 30, 2007. The data in the condensed consolidated balance sheet as of December 31, 2006 was derived from our audited consolidated balance sheet as of December 31, 2006, as presented in our Annual Report on Form 10-K for the year ended December 31, 2006. The condensed consolidated financial statements include the accounts of S1 and its wholly owned subsidiaries after the elimination of all significant intercompany accounts and transactions. We reclassified certain amounts in the prior period’s consolidated financial statements to conform to the current year presentation. Our operating results for the nine months ended September 30, 2007 are not necessarily indicative of the operating results that may be expected for the full year ending December 31, 2007.

     2. RECENT ACCOUNTING PRONOUNCEMENTS

          On January 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” This interpretation requires that realization of an uncertain income tax position must be “more likely than not” (i.e. greater than 50% likelihood of receiving a benefit) before it can be recognized in the financial statements. Further, this interpretation prescribes the benefit to be recorded in the financial statements as the amount most likely to be realized assuming a review by tax authorities having all relevant information and applying current conventions. This interpretation also clarifies the financial statement classification of tax-related penalties and interest and sets forth new disclosures regarding unrecognized tax benefits. The disclosure requirements and effect of adoption of this interpretation are presented in Note 9.

          In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”. This Statement defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in GAAP and expands disclosure related to the use of fair value measures in financial statements. SFAS No. 157 does not expand the use of fair value measures in financial statements, but standardizes its definition and guidance in GAAP. The standard emphasizes that fair value is a market-based measurement and not an entity-specific measurement based on an exchange transaction in which the entity sells an asset or transfers a liability (exit price). SFAS No. 157 establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entity’s own fair value assumptions as the lowest level. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are in the process of evaluating this standard and therefore have not yet determined the impact that the adoption of SFAS 157 will have on our financial position or results of operations.

          In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted for companies that have also elected to apply the provisions of SFAS No. 157, “Fair Value Measurements”. Companies are prohibited from retrospectively applying SFAS No. 159 unless they choose to early adopt both SFAS No. 157 and SFAS No. 159. We do not anticipate the implementation of this Statement will be material to our financial position and results of operations.

     3. DISCONTINUED OPERATIONS

          On August 11, 2006, we completed the sale of our Risk and Compliance segment, which did business as FRS. We

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received approximately $36.3 million in consideration which includes $3.5 million held in escrow and a working capital adjustment of $1.7 million. We recorded a gain of $32.3 million net of tax in 2006. We recorded expenses of approximately $1.3 million in connection with the sale including legal fees and other expenses. The escrow of $3.5 million is recorded in other current assets relating to the sale.

          On December 30, 2005, we completed the sale of our Edify segment. Under the terms of the agreement, we received approximately $33.5 million in cash and a working capital adjustment of $0.6 million in the second quarter of 2006 bringing the total sale price to $34.1 million. We recorded a gain of $24.4 million, net of tax in 2005. We recorded expenses of approximately $4.4 million in connection with the sale including legal fees and employee severance payments. In addition, under the agreement, we contracted to continue to be a reseller of Edify products following the closing of the transaction. Activity under the reseller agreement has not been significant to date.

          Revenues and losses from discontinued operations are as follows (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2007		2006			2007		2006
Revenues:
Risk and Compliance	$	—	$	2,176		$	—	$	12,434
Pretax income (loss) from discontinued operations
Risk and Compliance	$	—	$	(712	)	$	—	$	(1,969	)
Gain (loss) on disposal of Edify		—		(97	)		—		457
Gain on disposal of Risk and Compliance		—		32,263			—		32,263
Income tax benefit (expense)		—		(2	)		—		34
Income from discontinued operations	$	—	$	31,452		$	—	$	30,785

     4. GOODWILL AND INTANGIBLE ASSETS

          In September 2007, we entered into a source code license agreement with a third party for mobile phone banking software to be used with our Postilion and Enterprise products. We paid a source code license fee of $2.4 million which was capitalized as purchased technology included in intangible assets and is expected to be amortized over a period of five years.

          At September 30, 2007, our intangible assets consisted of the following (in thousands):

	Gross		Accumulated
	Carrying Value		Amortization
Purchased and acquired technology	$	21,938	$	(15,702	)
Customer relationships		12,000		(5,926	)
Total	$	33,938	$	(21,628	)

          We recorded amortization expense of $3.0 million and $3.7 million during the nine months ended September 30, 2007 and 2006, respectively. We estimate aggregate amortization expense for 2007 and the next four calendar years to be as follows (in thousands):

	2007		2008		2009		2010		2011
Enterprise	$	723	$	329	$	245	$	245	$	245
Postilion	$	3,389	$	3,326	$	2,445	$	1,335	$	1,282

          The changes in the carrying value of our goodwill by segment for the nine months ended September 30, 2007 are as follows (in thousands):

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	Enterprise			Postilion			Total
Balance, January 1, 2007	$	49,887		$	75,413		$	125,300
Utilization of acquisition related income tax benefits		(62	)		(262	)		(324	)
Balance, September 30, 2007	$	49,825		$	75,151		$	124,976

5. STOCK OPTION PLANS

          We maintain certain stock compensation plans providing for the grant of stock options, restricted stock units (“RSUs”), stock appreciation rights (“SARs”) and other forms of awards to officers, directors and employees. Substantially all stock options granted under the plans have ten-year contractual lives and generally vest and become exercisable ratably over four years from the date of grant, although certain stock options granted in 2006 vest and become exercisable ratably over two years. The RSUs and SARs awards have ten-year contractual terms and generally vest and become exercisable ratably over two years from the date of grant. The SARs are settled in cash and are recorded as liabilities with changes in fair value recognized over the vesting period in accordance with SFAS No. 123R. At the end of the vesting period, any SARs that have not been exercised will continue to be adjusted to fair value each quarter. For SARs, the fair value is recalculated at the end of the current period using a Black-Scholes option pricing model as the awards are settled in cash and our balance sheet reflects the current liability earned. The fair value of the RSUs is determined by the market price of our stock on the date of grant. For stock options, the fair value is estimated at the date of grant using a Black-Scholes option pricing model. In determining the fair value, management makes certain estimates related primarily to the expected term of the option, the volatility of our stock and the risk-free interest rate. These assumptions affect the estimated fair value of the option. As such, these estimates affect the compensation expense we record in future periods. These assumptions generally require significant analysis and judgment. Some of the assumptions are based on external data, while some assumptions are derived from our historical experience with share-based payments. We currently estimate expected term using our historical exercise and post-vesting cancellation activity and volatility by considering our historical stock volatility. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with the remaining term equal to the expected term used as the input to the Black-Scholes model. In order to properly calculate stock-based compensation expense, we must determine the historical rate of pre-vesting forfeitures. We estimate forfeitures using a weighted-average historical forfeiture rate. Our estimates of forfeitures are adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from their estimates.

          The Company uses the “with-and-without” or “incremental” approach for ordering tax benefits derived from the share-based payment awards. Using the with-and-without approach, actual income taxes payable for the period are compared to the amount of tax payable that would have been incurred absent the deduction for employee share-based payments in excess of the amount of compensation cost recognized for financial reporting. As a result of this approach, tax net operating loss carryforwards not generated from share-based payments in excess of cost recognized for financial reporting are considered utilized before the current period’s share-based deduction. As a result of this accounting treatment, as of September 30, 2007, of the Company’s approximate $231.3 million of domestic tax net operating loss carryforwards, the benefit of approximately $201.4 million of these tax net operating loss carryforwards will be accounted for directly to equity as additional paid-in-capital. Additionally, the Company has approximately $99.8 million foreign tax net operating loss carryforwards unaffected by this accounting treatment. There was no capitalized stock-based compensation cost as of September 30, 2007. We did not recognize any tax benefits during the nine months ended September 30, 2007.

          The fair values for stock options were determined using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2007			2006
Expected dividend yield		0	%		0	%
Expected volatility		45	%		60	%
Risk-free interest rate		4.9	%		4.8	%
Expected life		4.0	years		4.0	years

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          The fair values for SARs were determined using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2007			2006
Expected dividend yield		0	%		0	%
Expected volatility		44	%		59	%
Risk-free interest rate		3.9	%		4.6	%
Expected life		3.9	years		4.9	years

          The following table shows the stock-based compensation expense included in the condensed consolidated statement of operations for the nine months ended September 30, 2007 and 2006 (in thousands):

	Nine Months Ended September 30,
	2007		2006
Costs and expenses:
Professional services, support and maintenance	$	457	$	406
Data center		47		60
Selling and marketing		3,892		1,150
Product development		1,652		690
General and administrative		1,854		1,417
Discontinued operations		—		175
Total stock-based compensation expense	$	7,902	$	3,898

          At September 30, 2007, we had 458,161 shares available for future grants under the plans and our stock option plans provide for the issuance of 8,862,781 shares of common stock if all outstanding options and available grants were exercised. Awards that are settled in cash do not count against the maximum limit of shares in these plans. In the nine months ended September 30, 2007, we have granted 930,000 stock options at a weighted average grant price of $6.11 and 71,000 shares of restricted stock at a weighted average grant price of $8.32. The following table shows the total unrecognized compensation expense at September 30, 2007 related to non-vested awards and the weighted average period over which the expense is expected to be recognized using the mid point method:

	Unrecognized		Weighted Average
	Expense		Period
	(in thousands)		(in years)
Stock Options	$	5,400		1.13
Restricted Stock		900		0.75
Stock Appreciation Rights		5,700		1.09

     6. COMPREHENSIVE INCOME (LOSS)

          We have used derivative financial instruments to manage certain exposures to fluctuations in foreign currency to mitigate the risk that changes in exchange rates will adversely affect the eventual dollar cash flows resulting from the hedged transactions with a series of foreign currency options. Designation is performed on a specific exposure basis to support hedge accounting. The changes in fair value of these hedging instruments will be offset in part or in whole by corresponding changes in the cash flows of the underlying exposures being hedged. In general, we have not held or issued derivative financial instruments for trading purposes. Our hedging activity has been for specific exposures related to certain contracts or locations that have potential risk due to the currency used for costs of the services differing from the currency used to bill our customers. The hedging activity has not been material to our financial position or statement of operations.

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          The components of comprehensive income are as follows (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007		2006			2007			2006
Net income	$	5,148	$	33,345		$	13,064		$	30,790
Foreign currency translation adjustment		147		(327	)		313			(659	)
Unrealized income (loss) on cash flow hedges		1		(40	)		(18	)		(263	)
Comprehensive income	$	5,296	$	32,978		$	13,359		$	29,868

     7. RESTRUCTURING CHARGES

          2003 and Prior Restructuring Plans

          For restructuring plans undertaken prior to 2004, the restructuring reserves as of December 31, 2006 and September 30, 2007 and their utilization for the nine months ended September 30, 2007 are summarized below (in thousands). During the period, there were no changes in estimates.

	Lease Costs
Balance, December 31, 2006	$	5,161
Amounts utilized		(592	)
Balance, September 30, 2007	$	4,569

          2005 Restructuring Plan

          In the fourth quarter 2005, we approved a plan of reorganization to change the operating structure of our Enterprise and Postilion segments. Under the new structure, we organized as business units designed around products and addressable markets. The restructuring reserves as of December 31, 2006 and September 30, 2007 and their utilization for the nine months ended September 30, 2007 are summarized below (in thousands). During the period, there were no changes in estimates.

	Personnel Costs			Lease Costs			Total
Balance, December 31, 2006	$	660		$	3,645		$	4,305
Amounts utilized		(627	)		(1,022	)		(1,649	)
Balance, September 30, 2007	$	33		$	2,623		$	2,656

          2006 Restructuring Plan

          In the fourth quarter 2006, we approved a plan to further align our business units around products and addressable markets. The restructuring reserves as of December 31, 2006 and September 30, 2007 and their utilization for the nine months ended September 30, 2007 are summarized below (in thousands). During the period, there were no changes in estimates.

	Personnel Costs			Lease Costs			Total
Balance, December 31, 2006	$	4,018		$	5,994		$	10,012
Amounts utilized		(3,087	)		(1,971	)		(5,058	)
Balance, September 30, 2007	$	931		$	4,023		$	4,954

          The restructuring reserves at September 30, 2007 include future rent payments for vacated facilities, net of anticipated sublease income, and severance payments to terminated employees. We expect to make future cash payments, net of anticipated sublease income, related to these restructuring activities of approximately $12.2 million, of which we anticipate paying approximately $5.9 million within the next twelve months. This includes a termination settlement for one

11

vacated facility for $2.0 million, which is expected to close in the fourth quarter of 2007. Leases for our vacated facilities expire on various terms through 2011.

     8. CONTINGENCIES AND DEBT

     Litigation

          Except as noted below, there are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which we, or any of our subsidiaries is a party or which their property is subject.

          As previously reported, we were involved in litigation with Tradecard, Inc. relating to a claim of infringement of U.S. Patent 6,151,588 filed in the U.S. District Court for the Southern District of New York. The action was filed March 2003 against S1 Corporation, Bank of America Corporation and Bank of America National Association. In March 2006, a jury decided in our favor that we were not infringing and that Tradecard’s patent is invalid. Tradecard submitted a motion to the Federal District Court for reconsideration of the verdict. On September 6, 2007 the U.S. District Court for the Southern District of New York denied Tradecard’s motion for a new trial and for judgment as a matter of law. On October 5, 2007, Tradecard filed a notice of appeal to the Federal Circuit Court of Appeals. On November 7, 2007, we were informed by counsel for Tradecard that Tradecard has decided not to proceed with the appeal and that a stipulation of dismissal will be filed shortly.

     Sale-Leaseback Transaction

          In May 2006, we received $2.5 million for computer equipment and software in a sale-leaseback transaction. In accordance with SFAS No. 13, we accounted for this lease as a capital lease. The $0.2 million gain resulting from the transaction was deferred and is being amortized to depreciation expense over the life of the lease.

     Guarantees

          We typically grant our customers a warranty that guarantees that our products will substantially conform to our current specifications for 90 days from the delivery date. We also indemnify our customers for certain matters including third party claims of intellectual property infringement relating to the use of our products. We account for these clauses under FASB Staff Position FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others — an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” Accordingly, there are no liabilities recorded for these agreements as of September 30, 2007.

     Long-term Debt

          Our debt obligations consist mainly of notes payable on our property and capital leases on computer hardware equipment. In August 2007, we completed the purchase of our corporate headquarters for $8.0 million of which we paid $2.8 million in cash and assumed a note payable of $5.2 million. The note payable has monthly installments of $40 thousand including a fixed interest of 7.61% due in 2011. The note is secured by the property and a security deposit of $0.6 million. Long-term debt consists of the following at September 30, 2007 and December 31, 2006 (in thousands):

	September 30,			December 31,
	2007			2006
Capital leases	$	6,288		$	6,807
Note payable on property		5,232			—
Other notes payable		309			640
Total debt	$	11,829		$	7,447
Less current portion		(3,288	)		(3,328	)
Total long-term debt	$	8,541		$	4,119

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9. INCOME TAXES

          We adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, we recognized no cumulative effect adjustment. At the adoption date of January 1, 2007, we had $13.2 million of unrecognized tax benefits, none of which would affect our effective tax rate if recognized. At September 30, 2007, we have $11.5 million of unrecognized tax benefits of which $2.1 million is reflected as a non-current liability. Due to the release of the valuation allowance associated with a portion of these unrecognized tax benefits, a $1.8 million non-current deferred tax asset is also reflected on the balance sheet as of September 30, 2007.

          We recognize interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2007, we have approximately $27 thousand of accrued interest and penalties related to uncertain tax positions.

          We do not expect any significant increases in the unrecognized tax benefit within twelve months of the reporting date. During the quarter ended September 30, 2007, unrecognized tax benefits decreased by approximately $1.7 million due to the expiration of federal and state statue of limitations. Within twelve months of the reporting date, we expect that unrecognized tax benefits will decrease by approximately $2.0 million due to the expiration of the statute of limitations in various jurisdictions. The decrease relates primarily to intercompany loans and fixed assets.

          The tax years 2004, 2005 and 2006 remain open to examination by the major taxing jurisdictions to which we are subject. In addition, net operating loss carryforwards from the years 1997, 1998, 1999, 2000 and 2001 are subject to examination because these loss years intervene with the open years 2004, 2005 and 2006.

10. STOCKHOLDER’S EQUITY

          On March 12, 2007, our Board of Directors approved a tender offer to purchase up to $55.0 million of our common stock. The tender offer was completed in April 2007. We repurchased and retired a total of 16,155 shares for a cost of $0.6 million, which includes fixed fees for related transaction costs.

          On May 8, 2007, our Board of Directors authorized a stock repurchase program under which we may repurchase up to $30.0 million of our common stock from time to time in open market and privately negotiated transactions as market and business conditions warrant. On August 8, 2007, our Board of Directors authorized the repurchase of an additional $20.0 million of our common stock under our stock repurchase program, bringing the total authorization to $50.0 million. There is no expiration date for this program. Stock repurchases for the three months ended September 30, 2007 were 2,672,700 shares for a total cost of $19.7 million which includes related transaction fees of approximately $0.02 per share. Stock repurchases for the program since inception in May 2007 were 4,577,352 shares for a total cost of $34.7 million which includes related transaction fees of approximately $0.02 per share.

11. SEGMENT REPORTING AND MAJOR CUSTOMERS

          We operate and manage our business in two segments: Enterprise and Postilion. The Enterprise segment represents our global banking and insurance business, which includes our business with State Farm Mutual Automobile Insurance Company (“State Farm”). The Postilion segment represents the community financial, full service banking and lending businesses, and global ATM/payments business.

          We evaluate the performance of our operating segments based on their contribution before interest, other income and income taxes, as reflected in the tables presented below for the three and nine months ended September 30, 2007 and 2006. We do not use any asset-based metrics to measure the operating performance of our segments.

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          The following table shows revenues from continuing operations by revenue type for our reportable segments (in thousands):

	Software		Support and		Professional		Data
	Licenses		Maintenance		Services		Center		Other		Total
Three Months Ended September 30, 2007:
Enterprise	$	1,774	$	4,030	$	15,709	$	6,301	$	152	$	27,966
Postilion		6,517		7,665		3,717		5,346		103		23,348
Total	$	8,291	$	11,695	$	19,426	$	11,647	$	255	$	51,314

	Software		Support and		Professional		Data
	Licenses		Maintenance		Services		Center		Other		Total
Three Months Ended September 30, 2006:
Enterprise	$	5,291	$	3,527	$	14,159	$	5,186	$	138	$	28,301
Postilion		5,217		7,593		4,196		6,430		159		23,595
Total	$	10,508	$	11,120	$	18,355	$	11,616	$	297	$	51,896

	Software		Support and		Professional		Data
	Licenses		Maintenance		Services		Center		Other		Total
Nine Months Ended September 30, 2007:
Enterprise	$	4,116	$	11,418	$	48,485	$	18,095	$	465	$	82,579
Postilion		17,692		21,979		12,054		16,982		192		68,899
Total	$	21,808	$	33,397	$	60,539	$	35,077	$	657	$	151,478

	Software		Support and		Professional		Data
	Licenses		Maintenance		Services		Center		Other		Total
Nine Months Ended September 30, 2006:
Enterprise	$	7,831	$	10,282	$	38,789	$	15,512	$	408	$	72,822
Postilion		15,089		22,692		11,137		19,601		734		69,253
Total	$	22,920	$	32,974	$	49,926	$	35,113	$	1,142	$	142,075

          The following table shows operating results for our reportable segments (in thousands):

	Three Months Ended September 30, 2007
	Enterprise		Postilion		Total
Revenues	$	27,966	$	23,348	$	51,314
Operating expenses:
Direct costs		13,971		9,506		23,477
Selling and marketing		3,085		4,894		7,979
Product development		3,127		4,093		7,220
General and administrative		3,707		2,632		6,339
Depreciation		1,016		595		1,611
Amortization of other intangible assets		—		282		282
Total operating expenses		24,906		22,002		46,908
Segment operating income	$	3,060	$	1,346	$	4,406

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	Three Months Ended September 30, 2006
	Enterprise			Postilion		Total
Revenues	$	28,301		$	23,595	$	51,896
Operating expenses:
Direct costs		15,245			9,225		24,470
Selling and marketing		3,290			3,865		7,155
Product development		5,711			3,805		9,516
General and administrative		3,878			3,207		7,085
Restructuring costs		261			139		400
Depreciation		1,384			690		2,074
Amortization of other intangible assets		45			282		327
Total operating expenses		29,814			21,213		51,027
Segment operating (loss) income	$	(1,513	)	$	2,382	$	869

	Nine Months Ended September 30, 2007
	Enterprise		Postilion		Total
Revenues	$	82,579	$	68,899	$	151,478
Operating expenses:
Direct costs		42,281		26,431		68,712
Selling and marketing		9,814		13,330		23,144
Product development		9,107		11,805		20,912
General and administrative		11,465		9,283		20,748
Depreciation		3,377		1,805		5,182
Amortization of other intangible assets		45		847		892
Total operating expenses		76,089		63,501		139,590
Segment operating income	$	6,490	$	5,398	$	11,888

	Nine Months Ended September 30, 2006
	Enterprise			Postilion		Total
Revenues	$	72,822		$	69,253	$	142,075
Operating expenses:
Direct costs		41,508			27,129		68,637
Selling and marketing		9,271			10,442		19,713
Product development		17,718			11,281		28,999
General and administrative		10,066			9,214		19,280
Restructuring costs		898			384		1,282
Depreciation		3,805			1,992		5,797
Amortization of other intangible assets		133			848		981
Total operating expenses		83,399			61,290		144,689
Segment operating (loss) income	$	(10,577	)	$	7,963	$	(2,614	)

          Geography.Excluding discontinued operations, revenues from international operations were $13.2 million and $9.6 million for the three months ended September 30, 2007 and 2006, respectively. Excluding discontinued operations, revenues from international operations were $35.5 million and $25.2 million for the nine months ended September 30, 2007 and 2006, respectively. As of September 30, 2007 and 2006, approximately $1.0 million and $1.4 million, respectively, of total property and equipment are located outside of the United States.

          Subscription.Our Software license revenue includes subscription, or term based arrangements, which allow our customers the right to use our software during a specified period, typically three to five years. Generally, the amount of subscription fees is based on the number of end-users accessing the licensed system, subject in certain circumstances to minimum user levels. Subscription revenue is generally recognized ratably over the term of the arrangement and includes the rights to receive support services and unspecified upgrades and enhancements during the term. For certain Postilion customers, the subscription also entitles the customer to receive hosting services. Our total software license revenues include subscription revenue of $2.3 million and $0.9 million for the three months ended September 30, 2007 and 2006, respectively. Our total software license revenues include subscription revenue of $6.0 million and $2.0 million for the nine months ended September 30, 2007 and 2006, respectively. This increase reflects growing acceptance of the Postilion segment’s community

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financial products on a subscription basis. The Enterprise segment currently sells licenses on a perpetual basis, but sold subscription licenses in the past. As the number of customers on subscription arrangements increases, margins for our support and maintenance, data center, and licenses will be impacted by this shift in revenue.

          Major Customer.Currently, we have one major customer (defined as any customer who individually contributes more than 10% of total revenues) in the Enterprise segment. The following table indicates the percentage of revenue derived from this customer:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Total Revenues	2007			2006			2007			2006
Enterprise Segment		37	%		43	%		40	%		48	%
Total Company		20	%		24	%		22	%		25	%

12. NET INCOME (LOSS) PER COMMON SHARE

          We calculate earnings per share using the two-class method during periods which we record income from continuing operations. For periods which we record a loss from continuing operations, we calculate net loss per share as the net loss during the period divided by the weighted average number of common shares outstanding during the period as the effect of applying the two-class method would be anti-dilutive.

          Net income has been allocated to the common and convertible preferred stock based on their respective rights to share in dividends. We excluded the convertible preferred stock that converts to 1,070,000 shares of common stock from diluted earnings per share under the if-converted method because the effect is anti-dilutive. Diluted earnings per share is calculated to reflect the potential dilution that would occur if stock options, restricted stock, or other rights to issue common stock were exercised and resulted in additional shares of common stock outstanding that would share in our earnings.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
	(in thousands, except per share data)
Basic earnings per share:
Income from continuing operations	$	5,148		$	1,893		$	13,064		$	5
Amount allocated to participating preferred stockholders		(92	)		(28	)		(227	)		—
Income from continuing operations available to common stockholders — basic	$	5,056		$	1,865		$	12,837		$	5
Weighted average common shares outstanding		58,718			71,008			60,439			70,799
Basic income from continuing operations	$	0.09		$	0.03		$	0.21		$	—
Diluted earnings per share:
Income from continuing operations	$	5,148		$	1,893		$	13,064		$	5
Amount allocated to participating preferred stockholders		(92	)		(28	)		(227	)		—
Income from continuing operations available to common stockholders — diluted	$	5,056		$	1,865		$	12,837		$	5
Weighted average common shares outstanding		58,718			71,008			60,440			70,799
Weighted average effect of common stock equivalent Stock options and restricted stock		1,249			154			850			189
Weighted average diluted shares outstanding		59,967			71,162			61,290			70,988
Diluted income from continuing operations	$	0.08		$	0.03		$	0.21		$	—

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

          This quarterly report contains forward-looking statements and information relating to our subsidiaries and us. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” or similar terminology identify forward-looking statements. These statements are based on the beliefs of management as well as assumptions made using information currently available to management. Because these statements reflect the current views of management concerning future events, they involve risks, uncertainties and assumptions. Therefore, actual results may differ significantly from the results discussed in the forward-looking statements. You are urged to read the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2006 and in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, as filed with the Securities and Exchange Commission, as well as the risk factors discussed under Item 1A of Part II of this Form 10-Q. Except as required by law, we undertake no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available.

          The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes appearing elsewhere herein and our Annual Report on Form 10-K for the year ended December 31, 2006.

Overview

          S1 Corporation (“S1”) is a global provider of software solutions for financial organizations including banks, credit unions and insurance companies. We operate and manage S1 in two business segments: Enterprise and Postilion. The Enterprise segment represents global banking and insurance solutions primarily targeting larger financial institutions. The Postilion segment represents the community financial, full service banking and lending businesses in North America, and global ATM/payments business.

          We sell our solutions primarily to traditional financial services providers, such as banks and insurance companies, as well as transaction processors and large retailers. Our solutions address the needs of small, mid-sized and large organizations. We derive a significant portion of our revenues from licensing our solutions and providing professional services. We generate recurring revenue from support and maintenance as well as revenue related to hosting applications and electronic bill payment services in our data center. We also generate recurring revenues by charging our customers a periodic fee for term licenses including the right-to-use the software and receive maintenance and support for a specified period of time. For certain customers, this fee includes the right to receive hosting services. In discussions with our customers and investors, we use the word “subscription” as being synonymous with a term license. Subscription license revenue is recognized evenly over the term of the contract which is typically between 12 and 60 months, whereas perpetual license revenue is generally recognized upon execution of the contract and delivery or on a percentage of completion basis over the installation period. Subscription or term licenses combine the right to use the licensed software and the right to receive support and maintenance and unspecified enhancements and in some cases, hosting services, into one periodic fee and typically do not transfer the rights to the software to the customer at the end of the contract term.

          Our Enterprise segment supports channels a bank uses to interact with its customers, including self service channels like the internet for personal, business and corporate online banking and trade finance, and full service channels such as teller, branch and call center. We previously licensed the Enterprise suite of products on both a perpetual and subscription basis but, beginning in the fourth quarter of 2006, Enterprise products are primarily offered on a perpetual license basis. With the focus on selling perpetual licenses for our Enterprise products going forward, license revenues may fluctuate in any given period depending on the amount, timing and nature of customer licensing activity. In some instances, we saw that our announcement in 2006 regarding the exploration of strategic alternatives discouraged some customers from entering into contracts with us. As a result, following the conclusion of our strategic assessment, we expect our licensing activity to increase. However, given that the sales cycle for large financial institutions generally lasts from six to eighteen months, we expect this increase to be gradual.

          In the community bank and credit union market, our Postilion segment provides online personal and business internet banking, telephone banking, and full service banking applications including teller, sales and service activities including new account opening and the call center agent’s desktop applications. In addition, our Postilion segment includes our payments business which offers software that drives automated teller machines (ATM) and point-of-sale (POS) devices to customers of all sizes around the world. We license our Postilion suite of online and telephone banking applications primarily on a

17

subscription basis. Postilion’s ATM and POS applications and full service banking products are primarily licensed on a perpetual basis.

          In September 2007, we entered into a source code license agreement with a third party for mobile phone banking software. We intend to market this technology with both our Enterprise and Postilion products.

          We sell our solutions to small, mid-sized and large financial and retail organizations in two geographic regions: (i) Americas and (ii) International. Additional information about our business, geographic disclosures and major customers is presented in the Note 11 to our condensed consolidated financial statements in this report. We have approximately 3,000 financial institution customers, the majority of which are located in the United States.

Recent Accounting Pronouncements and Critical Accounting Policies and Estimates

          For a complete list of the recent accounting pronouncements, please refer to the Note 2 in the condensed consolidated financial statements contained elsewhere in this report. For a complete list of our critical accounting policies and estimates, please refer to the notes to the consolidated financial statements and the section for Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2006.

Quarterly and Year-to-Date financial highlights

          Financial highlights for three months ended September 30, 2007 compared to prior year:

• Income from continuing operations increased $3.3 million to $5.1 million;

• Product development costs are down $2.3 million due to lower costs following our restructuring activities in the fourth quarter of 2006;

• Selling and marketing, Product development, and General and administrative costs increased due to higher stock based compensation expense which increased by $1.8 million to $2.9 million;

• Stock repurchases of $19.7 million or 2.7 million shares;

• Source code license of mobile phone banking software for $2.4 million; and

• Restructuring payments of $1.1 million.

          Financial highlights for nine months ended September 30, 2007 compared to prior year:

• Income from continuing operations increased to $13.1 million from break even;

• Professional services revenues increased $10.6 million, due to growth in the Enterprise banking and Postilion payment business;

• Product development costs are down over $8.1 million due to lower costs following our restructuring activities in the fourth quarter of 2006;

• Selling and marketing, Product development, and General and administrative costs increased due to higher stock based compensation expense which increased by $4.0 million to $7.9 million;

• Stock repurchases of $35.3 million or 4.6 million shares;

• Source code license of mobile phone banking software for $2.4 million; and

• Restructuring payments of $7.3 million.

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Comparison of the Three Months Ended September 30, 2007 and 2006

          Revenues.The following table sets forth our revenue data for the three months ended September 30, 2007 and 2006 (in thousands):

	Software		Support and		Professional		Data
	Licenses		Maintenance		Services		Center		Other		Total
Three Months Ended September 30, 2007:
Enterprise	$	1,774	$	4,030	$	15,709	$	6,301	$	152	$	27,966
Postilion		6,517		7,665		3,717		5,346		103		23,348
Total	$	8,291	$	11,695	$	19,426	$	11,647	$	255	$	51,314

	Software		Support and		Professional		Data
	Licenses		Maintenance		Services		Center		Other		Total
Three Months Ended September 30, 2006:
Enterprise	$	5,291	$	3,527	$	14,159	$	5,186	$	138	$	28,301
Postilion		5,217		7,593		4,196		6,430		159		23,595
Total	$	10,508	$	11,120	$	18,355	$	11,616	$	297	$	51,896

          Total revenues decreased $0.6 million, or 1%, for the three months ended September 30, 2007 compared to the same period in 2006. We derived approximately 20% and 24% of our total revenues from our largest customer for the three months ended September 30, 2007 and 2006, respectively.

          Our software license revenue includes subscription, or term based arrangements, which allow our customers the right to use our software during a specified period, typically three to five years. Generally, the amount of subscription fees is based on the number of end-users accessing the licensed system, subject in certain circumstances to minimum user levels. Subscription revenue is generally recognized ratably over the term of the arrangement and includes the rights to receive support services and unspecified upgrades and enhancements during the term. For certain Postilion customers, the subscription also entitles the customer to receive hosting services. Our total software license revenues include subscription revenue of $2.3 million and $0.9 million for the three months ended September 30, 2007 and 2006, respectively. This reflects growing acceptance of the Postilion segment’s community financial products on a subscription basis. The Enterprise segment currently sells licenses on a perpetual basis, but sold subscription licenses in the past. As the number of customers on subscription arrangements increases, margins for our support and maintenance, data center, and licenses will be impacted by this shift in revenue.

          Since the sales cycle for large financial institutions and retailers can last from six to eighteen months, Software license and Professional services revenue can be impacted by one or two large customer agreements. Accordingly, Professional services revenue can increase or decrease based on projects and Software license revenue may fluctuate depending on the amount, timing and nature of customer licensing activity. When professional services are considered essential to the functionality of the software, we record revenue for the perpetual license and professional services over the implementation period using the contract accounting method, typically measured by the percentage of labor hours incurred to date to estimated labor hours for each contract. Otherwise, perpetual license revenue is recognized upon delivery of the software provided that all other revenue recognition criteria are met.

          Our Enterprise segment generated revenues of $28.0 million for the three months ended September 30, 2007, a $0.3 million decrease from the same period in 2006. Software license revenues for our Enterprise segment were $1.8 million for the three months ended September 30, 2007, a $3.5 million decrease from the same period in 2006. This decrease is due primarily to a large perpetual license sale in 2006 to one domestic customer for our corporate banking product where services provided by us were not considered essential to the functionality of the software. Support and maintenance revenues for our Enterprise segment were $4.0 million for the three months ended September 30, 2007, an increase of $0.5 million from the same period in 2006 due primarily to increased licensing activity in the corporate banking product and growth in our international business. Professional services revenues for our Enterprise segment were $15.7 million for the three months ended September 30, 2007, an increase of $1.6 million from the same period in 2006 due to an increase in the number of customer projects, especially by our corporate banking and international businesses including projects with our former Risk and Compliance business, partially offset by a decline in projects with our largest customer. We expect full year revenues

19

from the services agreement with our former Risk and Compliance business to be approximately $2 million. Professional service projects in 2006 were impacted by the delay in the release of the new Enterprise products. Data center revenues for our Enterprise segment were $6.3 million for the three months ended September 30, 2007, an increase of $1.1 million from same period in 2006 due to the increased volume of transactions for both our domestic and international customers. Other revenues are primarily related to the sale of third party hardware and software that is used in connection with our products. Other revenues fluctuate based on the timing and mix of products and services sold in connection with particular transactions. We derived approximately 37% and 43% of our Enterprise segment’s revenues from our largest customer for the three months ended September 30, 2007 and 2006, respectively.

          Our Postilion segment generated revenues of $23.3 million for the three months ended September 30, 2007, which is relatively unchanged from the same period in 2006. Software license revenues for our Postilion segment were $6.5 million for the three months ended September 30, 2007, an increase of $1.3 million from the same period in 2006. Subscription or term license revenues contributed to most of the increase primarily due to the conversion of community financial customers in North America from annual maintenance and support agreements to long-term subscription agreements, which in some cases, include hosting services. Additionally, our payments business had an increase of perpetual license sales which was offset by a decrease in volume of license sales to existing customers in our full service banking business. Support and maintenance revenues for the Postilion segment were relatively unchanged for the three months ended September 30, 2007 from the same period in 2006, which reflects growth in full service banking business that offsets the effect of converting of community financial customers to subscription pricing. Professional services revenues were $3.7 million for the three months ended September 30, 2007, a decrease of $0.5 million from the same period in 2006 due to a decrease in the number of projects in our full service banking business. Services revenue in any one quarter can be impacted by one or two large customer projects and therefore, can increase or decrease based on the projects. Data center revenues for our Postilion segment were $5.3 million for the three months ended September 30, 2007, a decrease of $1.1 million from the same period in 2006 due in part to customer attrition in our community financial business and the conversion of some hosted customers to subscription pricing. Other revenues are primarily related to the sale of third party hardware and software that is used in connection with our products. Other revenues fluctuate based on the timing and mix of products and services sold in connection with particular transactions.

          Direct costs.Direct costs decreased by $1.0 million to $23.5 million for the three months ended September 30, 2007 from the same period in 2006, which is mainly due to a decrease in costs of professional services, support and maintenance. As a percentage of revenue, direct costs were 46% and 47% for the three months ended September 30, 2007 and 2006, respectively. Direct costs exclude charges for depreciation of property and equipment.

          Costs of software licenses for our products sold include the cost of software components that we license from third parties as well as the amortization of purchased technology. In general, the cost of software licenses for our products is minimal because we internally develop most of the software components, the cost of which is reflected in product development expense as it is incurred. The cost of software licenses could increase in future periods as we license and install more of our products. Our products may include software components that we license from third parties. However, cost of software licenses will continue to vary with the mix of products sold. Purchased technology amortization was $0.7 million and $0.9 million for the three months ended September 30, 2007 and 2006, respectively. As the majority of costs of software license is the amortization of purchased technology, software license costs are generally flat but the license margin can fluctuate with a large license sale or when purchased technology becomes fully amortized. Overall, the costs of software license were 12% and 11% of software license revenues for the three months ended September 30, 2007 and 2006, respectively.

          Costs of professional services, support and maintenance consist primarily of personnel and related infrastructure costs. Direct costs associated with professional services, support and maintenance costs decreased $1.3 million for the three months ended September 30, 2007 from the same period in 2006. In 2005, we entered into a license agreement with a customer for several of our Enterprise products (“Enterprise Agreement”) in which we later determined that the cost to provide the implementation and customization services under the Enterprise Agreement would exceed the associated revenues. Therefore, we recorded a $1.5 million contract loss reserve related to the Enterprise Agreement in late 2005. During the third quarter of 2007, the Enterprise Agreement was renegotiated and subsequently replaced with a new license agreement for our Postilion voice, retail, and business banking products and we reduced our contract loss reserve by $1.3 million. Separately, in the third quarter of 2006, we recorded a contract loss reserve for an international Enterprise customer as we determined that the cost to provide the implementation and customization services would exceed the associated revenues.

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We are releasing this reserve over the implementation period in 2007, resulting in a decrease of $0.7 million in cost of professional services, support and maintenance. This was partially offset by increase of costs in our international Enterprise business to support the revenue growth in 2007. As a percentage of revenues, costs of professional services, support and maintenance were 52% and 59% of support and maintenance and professional services revenues for the three months ended September 30, 2007 and 2006, respectively.

          Costs of data center consist of personnel costs, facility costs and related infrastructure costs to support our data center business. Data center costs increased $0.6 million for the three months ended September 30, 2007 from the same period in 2006 due primarily to higher costs in our Enterprise segment from an increase in the number of transactions processed as reflected in the growth in Enterprise’s data center revenues. The Postilion segment’s conversion of customers to subscription pricing also had an impact on data center and software license cost as a percentage of revenue. As a percentage of data center revenues, costs of data center were 54% and 49% for the three months ended September 30, 2007 and 2006, respectively.

          Selling and marketing expenses.Total selling and marketing expenses increased by $0.8 million for the three months ended September 30, 2007 from the same period in 2006 due primarily to increased stock based compensation expense in both the Enterprise and Postilion segments. As a percentage of revenues, selling and marketing expenses were 16% and 14% for the three months ended September 30, 2007 and 2006, respectively.

          Product development expenses.Total product development expenses decreased by $2.3 million for the three months ended September 30, 2007 from the same period in 2006. This decrease is attributable to the Enterprise segment’s reduction in personnel and related expenses following the restructuring activities in the fourth quarter of 2006. The Postilion segment’s costs were up marginally as we continued to develop a new integrated platform combining the ATM/payment product and our community financial voice, retail, and business banking products. As a percentage of revenues, product development expenses were 14% and 18% for the three months ended September 30, 2007 and 2006, respectively.

          Historically, we have not capitalized product development costs because of the insignificant amount of costs incurred between technological feasibility and general customer release. However, if the amount of time between the completion of beta testing and general customer release lengthens, we may be required to capitalize certain software development costs in the future.

          General and administrative expenses.General and administrative expenses decreased by $0.7 million for the three months ended September 30, 2007 from the same period in 2006 due primarily to legal and consulting fees incurred in 2006 as part of our exploration of strategic alternatives. As a percentage of revenues, general and administrative expenses were 12% and 14% for the three months ended September 30, 2007 and 2006, respectively.

          Restructuring costs.Restructuring expenses were $0.4 million for the three months ended September 30, 2006 due primarily to changes in estimates of our facility lease costs from lower sublease income for our previously vacated locations. There were no restructuring charges for the three months ended September 30, 2007.

          Depreciation.Depreciation decreased by $0.5 million to $1.6 million for the three months ended September 30, 2007 from the same period in 2006. The decrease is primarily due to a reduction in capital expenditure spending in late 2006 and the first half of 2007.

          Amortization of other intangible assets.Amortization of other intangible assets was $0.3 million for the three months ended September 30, 2007 and 2006.

          Interest and other income, net.Interest and other income net was $0.9 million and $1.3 million for the three months ended September 30, 2007 and 2006, respectively. Our interest income has decreased due to the decrease in our cash balance as a result of our stock repurchasing activities in 2006 and 2007 of approximately $90 million partially offset by cash provided by operations and cash received from the exercise of employee stock options in 2007.

          Income tax expense.We recorded income tax expense of $0.1 million and $0.3 million for the three month periods ending September 30, 2007 and 2006, respectively. Although we have fully reserved net deferred tax assets of approximately $165.6 million as of December 31, 2006 primarily related to our NOLs and tax credit carryforwards, from

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time-to-time we are required to record an income tax provision in periods:
•	for tax expense in certain subsidiaries or jurisdictions for which we do not have NOLs to utilize;
•	in the United States due to limitations on the use of our federal NOLs for alternative minimum tax purposes which will be paid in cash;
•	if there are NOLs that were acquired as part of a business combination, upon which we placed a valuation allowance at the acquisition date. This results in non-cash income tax expense as goodwill is reduced and the valuation allowance is released; or
•	if it is more likely than not a tax benefit cannot be sustained, tax expense is recorded for the contingent tax liability.

          APB Opinion 28 requires that companies report income taxes on interim periods’ financial statements using an estimated annual effective tax rate. Using this method, income taxes are computed at the end of each interim period based on the best estimate of the effective rate expected to be applicable for the full fiscal year. Income forecasts prepared by us do not reflect the distinct taxable jurisdictions required to utilize this approach. Due to various domestic and foreign jurisdictions that our business operates in, it is difficult to produce accurate income forecasts by jurisdiction. Therefore, a reliable annual effective rate cannot be estimated for the full year. As such, we use a year-to-date effective tax rate that is updated each quarter.

          Income from discontinued operations.In the third quarter of 2006, income from discontinued operations of $31.5 million is primarily related to the gain from the sale of our Risk and Compliance business in August 2006.

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Comparison of the Nine Months Ended September 30, 2007 and 2006

          Revenues.The following table sets forth our revenue data for the nine months ended September 30, 2007 and 2006 (in thousands):

	Software		Support and		Professional		Data
	Licenses		Maintenance		Services		Center		Other		Total
Nine Months Ended September 30, 2007:
Enterprise	$	4,116	$	11,418	$	48,485	$	18,095	$	465	$	82,579
Postilion		17,692		21,979		12,054		16,982		192		68,899
Total	$	21,808	$	33,397	$	60,539	$	35,077	$	657	$	151,478

	Software		Support and		Professional		Data
	Licenses		Maintenance		Services		Center		Other		Total
Nine Months Ended September 30, 2006:
Enterprise	$	7,831	$	10,282	$	38,789	$	15,512	$	408	$	72,822
Postilion		15,089		22,692		11,137		19,601		734		69,253
Total	$	22,920	$	32,974	$	49,926	$	35,113	$	1,142	$	142,075

          Total revenues increased by $9.4 million, or 7%, to $151.5 million for the nine months ended September 30, 2007 compared to the same period in 2006. The increase was primarily in the Enterprise segment’s professional services revenue. Postilion segment revenues remained relatively unchanged for the nine months ended September 30, 2007 compared to the same period in 2006. We derived approximately 22% and 25% of our total revenues from our largest customer for the nine months ended September 30, 2007 and 2006, respectively. We expect revenue from State Farm as a percentage of total revenue to continue to decrease in future periods.

          Our software license revenue includes subscription, or term based arrangements, which allow our customers the right to use our software during a specified period, typically three to five years. Generally, the amount of subscription fees is based on the number of end-users accessing the licensed system, subject in certain circumstances to minimum user levels. Subscription revenue is generally recognized ratably over the term of the arrangement and includes the rights to receive support services and unspecified upgrades and enhancements during the term. For certain Postilion customers, the subscription also entitles the customer to receive hosting services. Our total Software license revenues include subscription revenue of $6.0 million and $2.0 million for the nine months ended September 30, 2007 and 2006, respectively. This reflects growing acceptance of the Postilion segment’s community financial products on a subscription basis. The Enterprise segment currently sells licenses on a perpetual basis, but sold subscription licenses in the past. As the number of customers on subscription arrangements increases, margins for our support and maintenance, data center, and licenses will be impacted by this shift in revenue.

          Since the sales cycle for large financial institutions and retailers can last from six to eighteen months, Software license and Professional services revenue can be impacted by one or two large customer agreements. Accordingly, Professional services revenue can increase or decrease based on projects and Software license revenue may fluctuate depending on the amount, timing and nature of customer licensing activity. When professional services are considered essential to the functionality of the software, we record revenue for the perpetual license and professional services over the implementation period using the contract accounting method, typically measured by the percentage of labor hours incurred to date to estimated labor hours for each contract. Otherwise, perpetual license revenue is recognized upon delivery of the software provided that all other revenue recognition criteria are met.

          Our Enterprise segment generated revenues of $82.6 million for the nine months ended September 30, 2007 compared with $72.8 million for the same period in 2006. Software license revenues for our Enterprise segment were $4.1 million for the nine months ended September 30, 2007, which is a decrease of $3.7 million from the same period in 2006. This decrease is due primarily to a large perpetual license sale in the third quarter of 2006 to one domestic customer for our corporate banking product where services provided by us were not considered essential to the functionality of the software. Additionally, we recorded a $0.6 million reserve in the second quarter of 2007 relating to amounts owed by an international customer. Support and maintenance revenues for our Enterprise segment were $11.4 million for the nine months ended

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September 30, 2007, which is an increase of $1.1 million from the same period in 2006 due primarily to increased licensing activity in the corporate banking product and growth in our international business. Professional services revenues for our Enterprise segment were $48.5 million for the nine months ended September 30, 2007, an increase of $9.7 million from the same period in 2006 due to growth in the number of customer projects, especially in our corporate banking and international businesses including projects with our former Risk and Compliance business, partially offset by a decline in projects with our largest customer. We expect the full year revenues from the services agreement with our former Risk and Compliance business to be approximately $2 million. Professional service projects in 2006 were impacted by the delay in the release of our Enterprise products. Data center revenues for our Enterprise segment were $18.1 million for the nine months ended September 30, 2007, an increase of $2.6 million from same period in 2006 due to the increased volume of transactions for both our domestic and international customers. Other revenues are primarily related to the sale of third party hardware and software that is used in connection with our products. Other revenues fluctuate based on the timing and mix of products and services sold in connection with particular transactions. We derived approximately 40% and 48% of our Enterprise segment’s revenues from our largest customer for the nine months ended September 30, 2007 and 2006, respectively. We believe revenues from our largest customer will be between $43 and $46 million for the full year 2007.

          Revenues for our Postilion segment were $68.9 million for the nine months ended September 30, 2007 which is a decrease of $0.4 million from the same period in 2006. Software license revenues for our Postilion segment were $17.7 million for the nine months ended September 30, 2007, an increase of $2.6 million from the same period in 2006. Subscription or term license contributed to most of the increase primarily due to the conversion of community financial customers in North America from annual maintenance and support agreements to long-term subscription agreements, which in some cases, include hosting services. Additionally, our payments business had an increase of perpetual license sales to international customers which was partially offset by a decrease of additional license sales in our full service banking business. Support and maintenance revenues for the Postilion segment were $22.0 million for the nine months ended September 30, 2007, which is a decrease of $0.7 million from the same period in 2006 due in part to previously unbilled full service banking revenues relating to one customer that we recognized in the second quarter of 2006. Additionally, Postilion’s support and maintenance revenues reflect growth in the full service banking business that offsets the conversion of community financial customers to subscription pricing. Professional services revenues for the Postilion segment were $12.1 million for the nine months ended September 30, 2007, an increase of $0.9 million from the same period in 2006. The increase in professional services revenues primarily resulted from several domestic and international projects in our payment business partially offset by the completion and amendment of certain work orders ($0.9 million) with a full service banking customer in 2006. Services revenue in any one quarter can be impacted by one or two large customer projects and therefore, can increase or decrease based on the projects. Data center revenues for our Postilion segment were $17.0 million for the nine months ended September 30, 2007, a decrease of $2.6 million from the same period in 2006 due in part to customer attrition in our community financial business and the conversion of some hosted customers to subscription pricing. Other revenues are primarily related to the sale of third party hardware and software that is used in connection with our products. Other revenues fluctuate based on the timing and mix of products and services sold in connection with particular transactions.

          Direct costs.Direct costs remained relatively unchanged at $68.7 million for the nine months ended September 30, 2007 from the same period in 2006. As a percentage of revenues, direct costs were 45% and 48% for the nine months ended September 30, 2007 and 2006, respectively. Direct costs exclude charges for depreciation of property and equipment.

          Costs of software licenses for our products sold include the cost of software components that we license from third parties as well as the amortization of purchased technology. In general, the cost of software licenses for our products is minimal because we internally develop most of the software components, the cost of which is reflected in product development expense as it is incurred. The cost of software licenses could increase in future periods as we license and install more of our products. Our products may include software components that we license from third parties. However, cost of software licenses will continue to vary with the mix of products sold. Purchased technology amortization was $2.1 million and $2.8 million for the nine months ended September 30, 2007 and 2006, respectively. As the majority of costs of software license is the amortization of purchased technology, software license costs are generally flat but the license margin can fluctuate with a large license sale or when purchased technology becomes fully amortized. Overall, the costs of software license were 13% and 14% of software license revenues for the nine months ended September 30, 2007 and 2006, respectively.

          Costs of professional services, support and maintenance consist primarily of personnel and related infrastructure

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costs. Direct costs associated with professional services, support and maintenance decreased $0.8 million for the nine months ended September 30, 2007. In 2005, we entered into a license agreement with a customer for several of our Enterprise products (“Enterprise Agreement”) in which we later determined that the cost to provide the implementation and customization services under the Enterprise Agreement would exceed the associated revenues. Therefore, we recorded a $1.5 million contract loss reserve related to the Enterprise Agreement in late 2005. During the third quarter of 2007, the Enterprise Agreement was renegotiated and subsequently replaced with a new license agreement for our Postilion voice, retail, and business banking products and we reduced our contract loss reserve by $1.3 million. Separately, in the third quarter of 2006, we recorded a contract loss reserve for an international Enterprise customer as we determined that the cost to provide the implementation and customization services would exceed the associated revenues. We are releasing this reserve over the implementation period in 2007, resulting in a decrease of $1.0 million in cost of professional services, support and maintenance. This was partially offset by increase of costs in our international Enterprise business to support the revenue growth in 2007. As a percentage of revenue, costs of professional services, support and maintenance were 50% and 58% of support and maintenance and professional services revenues for the second quarter of 2007 and 2006, respectively.

          Costs of data center consist of personnel costs, facility costs and related infrastructure costs to support our data center business. Data center costs increased $1.6 million for the nine months ended September 30, 2007 from the same period in 2006 due primarily to higher costs in our Enterprise segment from an increase in the number of transactions processed as reflected in the growth in Enterprise’s data center revenues. The Postilion segment’s conversion of customers to subscription pricing also had an impact on data center and software license cost as a percentage of revenue. As a percentage of data center revenues, costs of data center were 53% and 48% for the nine months ended September 30, 2007 and 2006, respectively.

          Selling and marketing expenses.Total selling and marketing expenses increased by $3.4 million for the nine months ended September 30, 2007 from the same period in 2006. The increase was mainly due to increased stock based compensation expense in both the Enterprise and Postilion segments. As a percentage of revenues, selling and marketing expenses were 15% and 14% for the nine months ended September 30, 2007 and 2006, respectively.

          Product development expenses.Total product development expenses decreased by $8.1 million to $20.9 million for the nine months ended September 30, 2007 from the same period in 2006. This decrease is attributable to the Enterprise segment’s reduction in personnel and related expenses following the restructuring activities in the fourth quarter of 2006. The Postilion segment’s costs increased slightly as we continued to develop a new integrated platform combining the ATM/payment product and our community financial voice, retail, and business banking products. As a percentage of revenues, product development expenses were 14% and 20% for the nine months ended 2007 and 2006, respectively.

          Historically, we have not capitalized product development costs because of the insignificant amount of costs incurred between technological feasibility and general customer release. However, if the amount of time between the completion of beta testing and general customer release lengthens, we may be required to capitalize certain software development costs in the future.

          General and administrative expenses.General and administrative expenses increased by $1.5 million for the nine months ended September 30, 2007 from the same period in 2006. The increase in 2007 is due to higher costs for stock based compensation expense, review of corporate tax strategies, and other professional fees which are partially offset by one time costs incurred in 2006 as part of our exploration of strategic alternatives. As a percentage of revenues, general and administrative expenses were 14% for the nine months ended September 30, 2007 and 2006.

          Restructuring costs.Restructuring expenses were $1.3 million for the nine months ended September 30, 2006 due primarily to the transition of personnel from the 2005 plan of reorganization and for changes in our estimates of our facility lease costs from lower sublease income for our vacated locations. There were no restructuring charges for the nine months ended September 30, 2007.

          Depreciation.Depreciation decreased by $0.6 million for the nine months ended September 30, 2007 from the same period in 2006. The decrease is primarily due to a reduction in capital expenditure spending in late 2006 and first half 2007.

          Amortization of other intangible assets.Amortization of other intangible assets was relatively unchanged at $0.9

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million for the nine months ended September 30, 2007 compared to the same period in 2006.

          Interest and other income, net.Interest and other income, net was $2.5 million and $3.5 million for the nine months ended September 30, 2007 and 2006, respectively. Our interest income has decreased due to the decrease in our cash balance as a result of our stock repurchasing activities in 2006 and 2007 of approximately $90 million partially offset by cash provided by operations and cash received from the exercise of employee stock options in 2007.

          Income tax expense.We recorded income tax expense of $1.3 million and $0.9 million for the nine month periods ending September 30, 2007 and 2006, respectively. Although we have fully reserved net deferred tax assets of approximately $165.6 million as of December 31, 2006 primarily related to our NOLs and tax credit carryforwards, from time-to-time we are required to record an income tax provision in periods:

• for tax expense in certain subsidiaries or jurisdictions for which we do not have NOLs to utilize;

• in the United States due to limitations on the use of our federal NOLs for alternative minimum tax purposes which will be paid in cash;

• if there are NOLs that were acquired as part of a business combination, upon which we placed a valuation allowance at the acquisition date. This results in non-cash income tax expense as goodwill is reduced and the valuation allowance is released; or

• if it is more likely than not a tax benefit cannot be sustained, tax expense is recorded for the contingent tax liability.

          APB Opinion 28 requires that companies report income taxes on interim periods’ financial statements using an estimated annual effective tax rate. Using this method, income taxes are computed at the end of each interim period based on the best estimate of the effective rate expected to be applicable for the full fiscal year. Income forecasts prepared by us do not reflect the distinct taxable jurisdictions required to utilize this approach. Due to various domestic and foreign jurisdictions that our business operates in, it is difficult to produce accurate income forecasts by jurisdiction. Therefore, a reliable annual effective rate cannot be estimated for the full year. As such, we use a year-to-date effective tax rate that is updated each quarter.

          Income from discontinued operations.In the nine months ended September 30, 2006, our income from discontinued operations of $30.8 million is primarily comprised of the gain on sale of the Risk and Compliance business in August 2006.

Liquidity and Capital Resources

               The following tables shows selected information about our cash flows during the nine months ended September 30, 2007 and 2006 and selected balance sheet data as of September 30, 2007 and December 31, 2006 (in thousands):

	Nine Months Ended September 30,
	2007			2006
Net cash provided by operating activities before changes in operating assets and liabilities	$	29,227		$	12,324
Change in operating assets and liabilities		(11,334	)		(15,408	)
Net cash provided by (used in) operating activities		17,893			(3,084	)
Net cash provided by investing activities		8,356			28,131
Net cash (used in) provided by financing activities		(27,902	)		3,189
Effect of exchange rates on cash and cash equivalents		579			(116	)
Net (decrease) increase in cash and cash equivalents	$	(1,074	)	$	28,120

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	As of
	September 30, 2007		December 31, 2006
Cash and cash equivalents	$	68,538	$	69,612
Short term investments		3,014		21,392
Working capital		71,583		83,227
Total assets		295,050		307,805
Total stockholders’ equity		215,812		224,229

          Operating Activities.During the nine months ended September 30, 2007, cash provided by operations was $16.3 million compared to cash used in operations of $3.1 million for same period in 2006. The improvement in cash flow from operations reflects the increase in margins for professional services, support and maintenance, and cost reductions following our restructuring activities in late 2006. Changes in operating assets and liabilities, especially trade accounts receivable, trade accounts payable and accrued expenses, are generally the result of timing differences between the collection of fees billed and payment of operating expenses.

         Cash provided by operations for the nine months ended September 30, 2007 included the effects of:

• our net income of $13.1 million;

• depreciation and amortization expense of $8.2 million;

• stock based compensation expense of $7.9 million;

• increase of $2.0 million due to an escrow deposit for a termination settlement of a vacated facility;

• decrease in accrued expenses and other liabilities of $11.8 million primarily due to payments made from the restructuring reserve and bonus payments;

• decrease of $5.1 million in accounts receivable due to the improvement of days sales outstanding to 85 days from 95 days; and

• decrease in deferred revenues for professional service projects of $4 million offset partially by an increase of $2.3 million in software licenses revenues.

          Cash used in operations for the nine months ended September 30, 2006 included the effects of:

• our net income of $30.8 million;

• depreciation and amortization expense of $9.6 million;

• gain on the disposal of Edify of $0.6 million and gain on disposal of the Risk and Compliance business of $32.3 million;

• provision of doubtful accounts receivable and billing adjustments of $0.9 million;

• stock based compensation expense of $3.9 million;

• decrease in accrued expenses and other liabilities of $10.3 million mainly due to payments made from our restructuring reserve;

• increase of $12.7 million in accounts receivable due to the timing of revenue recognized and billing terms on fixed price implementation projects during the quarter; and

• $7.0 million increase in deferred revenues resulting from annual billing of maintenance and subscription fees.

          Investing Activities.Historically, we have held a portion of our cash balances in auction-rate securities or other securities with maturities over 90 days and classified them as short-term investments. Cash provided by investing activities was $10.0 million for the nine months ended September 30, 2007 compared to $28.1 million in the same period in 2006.

          In the first nine months of 2007, we:

• converted $18.4 million, net, from short-term investments to cash and cash equivalents;

• paid an escrow deposit related to the purchase of our corporate headquarters of $1.6 million; and

• purchased $8.4 million of property, equipment, and technology, comprised of $2.8 million for property, $2.4 million for a source code license and the remainder for leasehold improvements and hardware expenditures.

          In the first nine months of 2006, we:

• paid $14.0 million to the shareholders of Mosaic in settlement of an earn-out in connection with the acquisition

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	of that business in 2004;
•	converted $18.2 million, net, from short-term investments to cash and cash equivalents;
•	received net proceeds from the sale of the Risk and Compliance segment of $32.6 million;
•	had cash held in escrow of $3.5 million related to the sale of the Risk and Compliance segment; and
•	purchased $5.2 million of property and equipment.

          Financing Activities.Cash used in financing activities was $27.9 million for the nine months ended September 30, 2007 compared to cash provided by financing activities of $3.2 million in same period in 2006.

          In the first nine months of 2007, we:

• paid $35.3 million for the repurchase of our common stock pursuant to a tender offer and authorized stock repurchase program;

• received $10.0 million from the sale of common stock under our employee stock option plans; and

• paid $2.3 million for capital lease obligations and $0.3 million for debt obligations.

          In the first nine months of 2006, we:

• received $2.5 million from the sale of common stock under our employee stock option plans;

• received $2.5 million from a sale lease back transaction; and

• paid $1.5 million for capital lease obligations and $0.4 million for debt obligations.

          We believe that our expected cash flows from operations together with our existing cash will be sufficient to meet our anticipated cash needs for working capital, debt obligations, and capital expenditures for at least the next 12 months. If cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or issue debt securities or establish a credit facility. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. The addition of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure that financing will be available in amounts or on terms acceptable to us, if at all.

          Stock Repurchase Program.On May 8, 2007, our Board of Directors authorized a stock repurchase program under which we may repurchase up to $30.0 million of our common stock from time to time in open market and privately negotiated transactions as market and business conditions warrant. On August 8, 2007, our Board of Directors authorized the repurchase of an additional $20.0 million of our common stock under our stock repurchase program, bringing the total authorization to $50.0 million. There is no expiration date for this program. Stock repurchases for the three months ended September 30, 2007 were 2,672,700 shares for a total cost of $19.7 million which includes related transaction fees of approximately $0.02 per share. Stock repurchases for the program since inception in May 2007 were 4,577,352 shares for a total cost of $34.7 million which includes related transaction fees of approximately $0.02 per share.

          Restructuring. The restructuring reserves include future rent payments for vacated facilities, net of anticipated sublease income and severance payments to terminated employees. As of September 30, 2007, we expect to make future cash payments, net of anticipated sublease income, related to these restructuring activities of approximately $12.2 million, of which we anticipate paying approximately $5.9 million within the next twelve months. This includes a termination settlement for one vacated facility for $2.0 million, which is expected to close in the fourth quarter of 2007. Leases for our vacated facilities expire on various terms through 2011.

          Debt Obligations. Our debt obligations consist mainly of notes payable on our property and capital leases on computer hardware equipment. As of September 30, 2007, we expect to make future payments related to these obligations of approximately $11.8 million, of which we anticipate paying approximately $3.3 million within the next twelve months. Leases for our hardware equipment expire on various terms within thirty-six months and the notes payable is due in 2011.

          Other Obligations.In the fourth quarter of 2007, we expect to have a cash liability of approximately $5.2 million related to our November 2006 Stock Appreciation Rights awards that vest and are exercisable at the discretion of the employees holding such awards. Additionally, in the fourth quarter of 2008, the remaining Stock Appreciation Rights awards are scheduled to vest and the estimated cash liability for these awards is $5.3 million based on our valuation as of September 30, 2007.

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Item 3.Quantitative and Qualitative Disclosures about Market Risk

          Quantitative and qualitative disclosures about market risk were included in Item 7A of our 2006 Annual Report on Form 10-K. With the exception of below, there have been no significant changes in our market risk from December 31, 2006.

          We have used derivative financial instruments to manage exposures to fluctuations in foreign currency to mitigate the risk that changes in exchange rates will adversely affect the eventual dollar cash flows resulting from the hedged transactions with a series of foreign currency options. Designation is performed on a specific exposure basis to support hedge accounting. The changes in fair value of these hedging instruments will be offset in part or in whole by corresponding changes in the cash flows of the underlying exposures being hedged. We do not currently hold or issue derivative financial instruments for trading purposes. Our hedging activity is for specific exposures related to certain contracts or locations that have potential risk due to the currency as the costs of services differs from the currency used to bill our customers. The hedging activity is not material to our financial position or statement of operations. We believe most of our international operations are naturally hedged for foreign currency risk as our foreign subsidiaries invoice their customers and satisfy their obligations in their local currencies. However, we may hedge certain customer contracts or development locations that are not considered to be naturally hedged by revenues and costs in the functional currency. However, there can be no guarantee that foreign currency fluctuations in the future will not be significant or fully hedged.

Item 4.Controls and Procedures

          Evaluation of Disclosure Controls. Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported in within the time periods specified in Securities and Exchange Commission rules and forms. Additionally, our disclosure controls and procedures were also effective in ensuring that information required to be disclosed in our Exchange Act reports is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosures.

          Changes in Internal Control over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2007, which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1.Legal Proceedings

     Litigation

          Except as noted below, there are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which we, or any of our subsidiaries is a party or which their property is subject.

          As previously reported, we were involved in litigation with Tradecard, Inc. relating to a claim of infringement of U.S. Patent 6,151,588 filed in the U.S. District Court for the Southern District of New York. The action was filed March 2003 against S1 Corporation, Bank of America Corporation and Bank of America National Association. In March 2006, a jury decided in our favor that we were not infringing and that Tradecard’s patent is invalid. Tradecard submitted a motion to the Federal District Court for reconsideration of the verdict. On September 6, 2007 the U.S. District Court for the Southern District of New York denied Tradecard’s motion for a new trial and for judgment as a matter of law. On October 5, 2007, Tradecard filed a notice of appeal to the Federal Circuit Court of Appeals. On November 7, 2007, we were informed by counsel for Tradecard that Tradecard has decided not to proceed with the appeal and that a stipulation of dismissal will be filed shortly.

Item 1A.Risk Factors

          Except as noted below, during the three months ended September 30, 2007, there were no material changes to the Risk Factors relevant to our operations, which are described in the Annual Report on Form 10-K for the year ended December 31, 2006 as supplemented in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.

          You should consider carefully the risk factors in our Annual Report on Form 10-K for the year ended December 31, 2006, in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, and the additional risk factors noted below. If any of these risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could decline, and you may lose all or a part of the money you paid to buy our common stock.

          We depend on one customer, State Farm Mutual Automobile Insurance Company (“State Farm”), for a significant portion of our revenue and if that customer terminates its contract with us, or reduces the amount of software or services they buy from us, our revenues and financial performance would decline

          State Farm accounted for 25% of our total revenue from continuing operations in 2006 and 2005 and 22% of our total revenue from continuing operations for the first nine months of 2007. We expect revenue from State Farm as a percentage of total revenue to continue to decrease in future periods. In 2007, we expect revenue from State Farm to be between $43 and $46 million.  In the ordinary course of our relationship with State Farm, they may cancel or reschedule projects at any time, without significant penalty. We can give no assurance that we will be able to retain State Farm as a customer or that we will be able to maintain the same level of revenue contribution from State Farm in the future. State Farm’s license and possession rights for the source code of the Enterprise and insurance products give them flexibility on how they choose to further invest in these products. If State Farm was to decrease the amount of software or services they buy from us, it could materially adversely affect our results of operations.

     Security breaches or computer viruses could harm our business by disrupting our delivery of services and damaging our reputation and business.

     Our products and business may be vulnerable to unauthorized access, computer viruses and other disruptive problems. We maintain and transmit confidential financial information in providing certain of our services and users of electronic commerce are concerned about the security of transmissions over public networks. Accordingly, it is critical that our facilities and infrastructure remain secure. A security breach affecting us could damage our reputation, deter financial institutions from purchasing our products, deter their end user customers from using our products, or result in liability to us.

     Privacy, security, and compliance concerns continue to increase. Security compromises, including identity theft, could deter people from using electronic commerce services such as ours. We may need to spend significant capital or other resources for compliance requirements and protection against the threat of security breaches or to alleviate problems caused by security breaches. Additionally, computer viruses could infiltrate our systems and disrupt our business. Any inability to prevent security breaches or computer viruses could cause our customers to lose confidence in our services and terminate their agreements with us, and could reduce our ability to attract new customers.

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

(c) The following table provides information with respect to any purchase made by or on behalf of the Company or any “affiliated purchaser”, as defined in Section 240.10b-18(a)(3) of the Securities Exchange Act of 1934, of shares of our common stock.

     Purchases of Equity Securities by the Issuer and Affiliated Purchasers

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							Maximum number (or
					Total number of		approximate dollar
		Total			shares purchased		value) of shares that
		number			as part of a publicly		may yet be purchased
	of shares		Average price		announced plan or		under the plan or
Period	purchased		paid per share		program		program
July 1, 2007 - July 31, 2007		520,600	$	7.61		520,600	$	11,041,563
August 1, 2007 - August 31, 2007		2,088,300	$	7.27		2,088,300	$	15,858,993
September 1, 2007 - September 30, 2007		63,800	$	8.48		63,800	$	15,317,884
Total		2,672,700	$	7.37		2,672,700

          On March 12, 2007, our Board of Directors approved a tender offer to purchase up to $55.0 million of our common stock. The tender offer was completed in April 2007. We repurchased and retired a total of 16,155 shares for a cost of $0.6 million, which includes fixed fees for related transaction costs.

          On May 8, 2007, our Board of Directors authorized a stock repurchase program under which we may repurchase up to $30.0 million of our common stock from time to time in open market and privately negotiated transactions as market and business conditions warrant. On August 8, 2007, our Board of Directors authorized the repurchase of an additional $20.0 million of our common stock under our stock repurchase program, bringing the total authorization to $50.0 million. There is no expiration date for this program.

Item 6.Exhibits

Exhibit
No.	Exhibit Description
3.1	Amended and Restated Certificate of Incorporation of S1 Corporation (“S1”) (filed as Exhibit 1 to S1’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission (the “SEC”) on September 30, 1998 and incorporated herein by reference).
3.2	Certificate of Amendment of Amended and Restated Certificate of Incorporation of S1 dated June 3, 1999 (filed as Exhibit 4.2 to S1’s Registration Statement on Form S-8 (File No. 333-82369) filed with the SEC on July 7, 1999 and incorporated herein by reference).
3.3	Certificate of Amendment of Amended and Restated Certificate of Incorporation of S1 dated November 10, 1999 (filed as Exhibit 3.3 to S1’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and incorporated herein by reference).
3.4	Certificate of Designation for S1’s Series B Redeemable Convertible Preferred Stock (filed as Exhibit 2 to S1’s Registration Statement on Form 8-A filed with the SEC on September 30, 1998 and incorporated herein by reference).
3.5	Amended and Restated Bylaws of S1, as amended (filed as Exhibit 3.6 to S1’s Quarterly Report on Form 10-Q filed with the SEC on May 8, 2006 and incorporated herein by reference).
4.1	Specimen certificate for S1’s common stock (filed as Exhibit 4 to S1’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000 and incorporated herein by reference).
4.2	Specimen certificate for S1’s Series B Redeemable Convertible Preferred Stock (filed as Exhibit 4.3 to S1’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and incorporated herein by reference).
31.1	Certification of Chief Executive Officer

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Exhibit
No.	Exhibit Description
31.2	Certification of Chief Financial Officer
32.1	Certificate of Chief Executive Officer pursuant to §906 of the Sarbanes-Oxley Act of 2002
32.2	Certificate of Chief Financial Officer pursuant to §906 of the Sarbanes-Oxley Act of 2002

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SIGNATURE

          Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of November 9, 2007.

S1 CORPORATION
By:	/s/ JOHN A. STONE
	John A. Stone
	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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Exhibit Index

Exhibit
No.	Exhibit Description
31.1	Certification of Chief Executive Officer
31.2	Certification of Chief Financial Officer
32.1	Certificate of Chief Executive Officer pursuant to §906 of the Sarbanes-Oxley Act of 2002
32.2	Certificate of Chief Financial Officer pursuant to §906 of the Sarbanes-Oxley Act of 2002

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