##### Table of Contents



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, 2008
 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. Employerincorporation or organization)
    
    Identification No.)705 Westech DriveNorcross, Georgia
    
    30092(Address of principal executive offices)
    
    (Zip Code)
 (404) 923-3500
 (Former name if changed since last report.)
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



S1 CORPORATION
 QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
 TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
    
    
    2Condensed Consolidated Statements of Operations for the Three Months and Nine Months ended
September 30, 2008 and 2007
    
    
    3Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2008
and 2007
    
    
    4Condensed Consolidated Statements of Stockholders Equity and Comprehensive Income for the Nine
Months ended September 30, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    29PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 6. Exhibits
    
    
    31Signature
    
    
    32Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 Item 1  Financial Statements
 S1 CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (IN THOUSANDS, EXCEPT SHARE DATA)
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    75,386
    
    
    $
    45,011Short-term investments
    
    
    6,454
    
    
    
    23,855Accounts receivable, net
    
    
    43,647
    
    
    
    39,969Prepaid expenses
    
    
    4,892
    
    
    
    3,354Other current assets
    
    
    1,817
    
    
    
    6,389Total current assets
    
    
    132,196
    
    
    
    118,578Property and equipment, net
    
    
    22,342
    
    
    
    20,906Intangible assets, net
    
    
    8,325
    
    
    
    11,240Goodwill, net
    
    
    125,160
    
    
    
    125,281Other assets
    
    
    4,220
    
    
    
    5,839Total assets
    
    $
    292,243
    
    
    $
    281,844LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,707
    
    
    $
    2,300Accrued compensation and benefits
    
    
    13,074
    
    
    
    10,649Accrued restructuring
    
    
    2,073
    
    
    
    3,043Accrued other expenses
    
    
    12,662
    
    
    
    8,198Deferred revenues
    
    
    28,447
    
    
    
    26,345Current portion of debt obligation
    
    
    3,153
    
    
    
    3,725Total current liabilities
    
    
    62,116
    
    
    
    54,260Debt obligation, excluding current portion
    
    
    6,592
    
    
    
    8,805Accrued restructuring, excluding current portion
    
    
    4,237
    
    
    
    6,181Other liabilities
    
    
    1,075
    
    
    
    2,693Total liabilities
    
    
    74,020
    
    
    
    71,939Stockholders equity:Preferred stock
    
    
    10,000
    
    
    
    10,000Common stock
    
    
    558
    
    
    
    567Additional paid in capital
    
    
    1,807,732
    
    
    
    1,810,783Accumulated deficit
    
    
    (1,593,290
    )
    
    
    (1,609,807
    )Treasury Stock
    
    
    (2,362
    )
    
    
    Accumulated other comprehensive loss:Net gain (loss) on derivative financial instruments
    
    
    30
    
    
    
    (97
    )Cumulative foreign currency translation adjustment
    
    
    (4,445
    )
    
    
    (1,541
    )Total stockholders equity
    
    
    218,223
    
    
    
    209,905Total liabilities and stockholders equity
    
    $
    292,243
    
    
    $
    281,844Preferred shares issued and outstanding
    
    
    749,064
    
    
    
    749,064Common shares issued and outstanding
    
    
    55,754,239
    
    
    
    56,748,906Common shares held in treasury
    
    
    380,551
    
    
    
    
   2




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##### Table of Contents



S1 CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Software licenses
    
    $
    9,129
    
    
    $
    8,291
    
    
    $
    26,523
    
    
    $
    21,808Support and maintenance
    
    
    12,244
    
    
    
    11,695
    
    
    
    36,532
    
    
    
    33,397Professional services
    
    
    24,905
    
    
    
    19,426
    
    
    
    69,632
    
    
    
    60,539Data center
    
    
    12,080
    
    
    
    11,647
    
    
    
    36,268
    
    
    
    35,077Other
    
    
    291
    
    
    
    255
    
    
    
    855
    
    
    
    657Total revenues
    
    
    58,649
    
    
    
    51,314
    
    
    
    169,810
    
    
    
    151,478Operating expenses:Cost of software licenses (1)
    
    
    927
    
    
    
    975
    
    
    
    2,997
    
    
    
    2,807Cost of professional services, support and maintenance (1)
    
    
    19,405
    
    
    
    16,999
    
    
    
    54,888
    
    
    
    49,723Cost of data center (1)
    
    
    6,639
    
    
    
    6,333
    
    
    
    19,597
    
    
    
    18,522Cost of other revenue
    
    
    132
    
    
    
    34
    
    
    
    241
    
    
    
    306Selling and marketing
    
    
    8,360
    
    
    
    7,978
    
    
    
    25,919
    
    
    
    23,143Product development
    
    
    7,658
    
    
    
    6,357
    
    
    
    21,440
    
    
    
    18,267General and administrative
    
    
    6,094
    
    
    
    6,339
    
    
    
    18,912
    
    
    
    20,748Depreciation
    
    
    1,974
    
    
    
    1,611
    
    
    
    5,837
    
    
    
    5,182Amortization of other intangible assets
    
    
    283
    
    
    
    282
    
    
    
    848
    
    
    
    892Total operating expenses (2)
    
    
    51,472
    
    
    
    46,908
    
    
    
    150,679
    
    
    
    139,590Operating income
    
    
    7,177
    
    
    
    4,406
    
    
    
    19,131
    
    
    
    11,888Interest and other income, net
    
    
    296
    
    
    
    855
    
    
    
    714
    
    
    
    2,510Income before income tax expense
    
    
    7,473
    
    
    
    5,261
    
    
    
    19,845
    
    
    
    14,398Income tax expense
    
    
    (1,282
    )
    
    
    (113
    )
    
    
    (3,328
    )
    
    
    (1,334
    )Net income
    
    $
    6,191
    
    
    $
    5,148
    
    
    $
    16,517
    
    
    $
    13,064Earnings per share:Basic
    
    $
    0.11
    
    
    $
    0.09
    
    
    $
    0.29
    
    
    $
    0.21Diluted
    
    $
    0.11
    
    
    $
    0.08
    
    
    $
    0.28
    
    
    $
    0.21Weighted average common shares outstanding  basic
    
    
    56,559,777
    
    
    
    58,841,870
    
    
    
    56,577,987
    
    
    
    60,511,758Weighted average common shares outstanding  fully diluted
    
    
    57,643,062
    
    
    
    60,090,298
    
    
    
    57,413,725
    
    
    
    61,361,976
 
 (1)
    
    Excludes charges for depreciation. Cost of software license includes amortization of
purchased technology.(2)
    
    Includes stock-based compensation expenses of $0.4 and $2.9 million for the three
months ended September 30, 2008 and 2007, respectively, and $4.6 and $7.9 million for the
nine months ended September 30, 2008 and 2007, respectively. For further discussion,
please refer to Note 11 of the unaudited condensed consolidated financial statements.   3




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##### Table of Contents



S1 CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (Unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    16,517
    
    
    $
    13,064Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    8,752
    
    
    
    8,224Provision for doubtful accounts receivable and billing adjustments
    
    
    (342
    )
    
    
    37Stock-based compensation expense
    
    
    4,605
    
    
    
    7,902Changes in assets and liabilities:(Increase) decrease in accounts receivable
    
    
    (3,610
    )
    
    
    5,130Decrease (increase) in prepaid expenses and other assets
    
    
    1,068
    
    
    
    (3,485
    )Increase (decrease) in accounts payable
    
    
    134
    
    
    
    (629
    )Increase (decrease) in accrued expenses and other liabilities
    
    
    1,977
    
    
    
    (10,010
    )Increase (decrease) in deferred revenues
    
    
    2,053
    
    
    
    (2,340
    )Net cash provided by operating activities
    
    
    31,154
    
    
    
    17,893Cash flows from investing activities:Maturities of short-term investment securities
    
    
    20,653
    
    
    
    29,255Purchases of short-term investment securities
    
    
    (3,252
    )
    
    
    (10,877
    )Amounts held in escrow related to sale of business
    
    
    3,712
    
    
    
    Amounts held in escrow related to property
    
    
    
    
    
    
    (1,638
    )Purchases of property, equipment and technology
    
    
    (7,273
    )
    
    
    (8,384
    )Net cash provided by investing activities
    
    
    13,840
    
    
    
    8,356Cash flows from financing activities:Proceeds from exercise of employee stock options
    
    
    858
    
    
    
    9,990Payments on stock appreciation rights
    
    
    (168
    )
    
    
    Payments on capital leases and debt obligations
    
    
    (2,785
    )
    
    
    (2,617
    )Repurchase of common stock
    
    
    (10,167
    )
    
    
    (35,275
    )Net cash used in financing activities
    
    
    (12,262
    )
    
    
    (27,902
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (2,357
    )
    
    
    579Net increase (decrease) in cash and cash equivalents
    
    
    30,375
    
    
    
    (1,074
    )Cash and cash equivalents at beginning of period
    
    
    45,011
    
    
    
    69,612Cash and cash equivalents at end of period
    
    $
    75,386
    
    
    $
    68,538Noncash investing and financing activities:Equipment financed through capital leases
    
    $
    
    
    
    $
    1,761Property financed through notes payable
    
    
    
    
    
    
    5,238
   4




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##### Table of Contents



S1 CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 AND COMPREHENSIVE INCOME
 (IN THOUSANDS, EXCEPT SHARE DATA)
 (Unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalPreferred Stock
    
    
    Treasury Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Stockholders
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    Equity
    
    
    IncomeBalance at December 31, 2006
    
    
    749,064
    
    
    $
    10,000
    
    
    
    
    
    
    $
    
    
    
    
    61,290,973
    
    
    $
    613
    
    
    $
    1,845,529
    
    
    $
    (1,629,302
    )
    
    $
    (2,611
    )
    
    $
    224,229Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,064
    
    
    
    
    
    
    
    13,064
    
    
    
    13,064Net unrealized gains on investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    39
    
    
    
    39Change in cumulative foreign currency translation
adjustment, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    313
    
    
    
    313
    
    
    
    313Common stock issued upon the exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,711,946
    
    
    
    17
    
    
    
    9,981
    
    
    
    
    
    
    
    
    
    
    
    9,998
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,452
    
    
    
    
    
    
    
    
    
    
    
    3,452
    
    
    
    Restricted stock issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,441
    
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    Repurchase and retirement of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,593,507
    )
    
    
    (46
    )
    
    
    (35,229
    )
    
    
    
    
    
    
    
    
    
    
    (35,275
    )
    
    
    Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    13,416Balance at September 30, 2007
    
    
    749,064
    
    
    $
    10,000
    
    
    
    
    
    
    $
    
    
    
    
    58,420,853
    
    
    $
    584
    
    
    $
    1,823,725
    
    
    $
    (1,616,238
    )
    
    $
    (2,259
    )
    
    $
    215,812Balance at December 31, 2007
    
    
    749,064
    
    
    $
    10,000
    
    
    
    
    
    
    $
    
    
    
    
    56,748,906
    
    
    $
    567
    
    
    $
    1,810,783
    
    
    $
    (1,609,807
    )
    
    $
    (1,638
    )
    
    $
    209,905Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,517
    
    
    
    
    
    
    
    16,517
    
    
    
    16,517Net unrealized gain on investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127
    
    
    
    127
    
    
    
    127Change in cumulative foreign currency translation
adjustment, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,904
    )
    
    
    (2,904
    )
    
    
    (2,904
    )Common stock issued upon the exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    214,452
    
    
    
    2
    
    
    
    931
    
    
    
    
    
    
    
    
    
    
    
    933
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,887
    
    
    
    
    
    
    
    
    
    
    
    3,887
    
    
    
    Restricted stock issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,387
    
    
    
    
    
    
    
    (75
    )
    
    
    
    
    
    
    
    
    
    
    (75
    )
    
    
    Repurchase and retirement of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,254,506
    )
    
    
    (11
    )
    
    
    (7,794
    )
    
    
    
    
    
    
    
    
    
    
    (7,805
    )
    
    
    Treasury Stock
    
    
    
    
    
    
    
    
    
    
    (380,551
    )
    
    
    (2,362
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,362
    )
    
    
    Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    13,740Balance at September 30, 2008
    
    
    749,064
    
    
    $
    10,000
    
    
    
    (380,551
    )
    
    $
    (2,362
    )
    
    
    55,754,239
    
    
    $
    558
    
    
    $
    1,807,732
    
    
    $
    (1,593,290
    )
    
    $
    (4,415
    )
    
    $
    218,223
   5




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##### Table of Contents



S1 CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. BACKGROUND AND BASIS OF PRESENTATION
   2. RECENT ACCOUNTING PRONOUNCEMENTS
    6




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##### Table of Contents



3. INVESTMENTS
  September 30,
    
    
    December 31,2008
    
    
    2007Certificates of deposit
    
    $
    2,568
    
    
    $
    12,961Mutual fund trust
    
    
    3,886
    
    
    
    10,894Total
    
    $
    6,454
    
    
    $
    23,855
 4. FAIR VALUE MEASUREMENTS
 SFAS
No. 157, SFAS No. 157
  7




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##### Table of Contents



Fair Value Measurements at Reporting Date UsingQuoted Prices in
    
    
    
    
    
    
    SignificantActive Markets for
    
    
    Significant Other
    
    
    UnobservableCarrying
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    InputsValue
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Mutual fund trust
    
    $
    3,886
    
    
    $
    
    
    
    $
    3,886
    
    
    $
    Derivative assets
    
    
    30
    
    
    
    
    
    
    
    30
    
    
    
    Total
    
    $
    3,916
    
    
    $
    
    
    
    $
    3,916
    
    
    $
    
 5. OTHER CURRENT ASSETS
  September 30,
    
    
    December 31,2008
    
    
    2007Deferred tax assets
    
    $
    133
    
    
    $
    208Escrow deposits and restricted cash
    
    
    992
    
    
    
    4,943Other receivables (non-customer)
    
    
    692
    
    
    
    1,238Total
    
    $
    1,817
    
    
    $
    6,389
  8




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##### Table of Contents



6. GOODWILL AND INTANGIBLE ASSETS
  Gross
    
    
    Accumulated
    
    
    NetCarrying Value
    
    
    Amortization
    
    
    Carrying ValuePurchased and acquired technology
    
    $
    21,938
    
    
    $
    (18,557
    )
    
    $
    3,381Customer relationships
    
    
    12,000
    
    
    
    (7,056
    )
    
    
    4,944Total
    
    $
    33,938
    
    
    $
    (25,613
    )
    
    $
    8,325
  2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012Enterprise
    
    $
    329
    
    
    $
    245
    
    
    $
    245
    
    
    $
    245
    
    
    $
    184Postilion
    
    
    3,325
    
    
    
    2,445
    
    
    
    1,335
    
    
    
    1,282
    
    
    
    706Total Company
    
    $
    3,654
    
    
    $
    2,690
    
    
    $
    1,580
    
    
    $
    1,527
    
    
    $
    890
  Enterprise
    
    
    Postilion
    
    
    TotalBalance, December 31, 2007
    
    $
    49,616
    
    
    $
    75,665
    
    
    $
    125,281Utilization of acquisition related
income tax benefits
    
    
    (121
    )
    
    
    
    
    
    
    (121
    )Balance September 30, 2008
    
    $
    49,495
    
    
    $
    75,665
    
    
    $
    125,160
 7. RESTRUCTURING CHARGES
 2003 and Prior Restructuring Plans
 Lease CostsBalance, December 31, 2007
    
    $
    2,290Amounts utilized
    
    
    (480
    )Adjustments
    
    
    26Balance, September 30, 2008
    
    $
    1,836
 2005 Restructuring Plan
 Personnel Costs
    
    
    Lease Costs
    
    
    TotalBalance, December 31, 2007
    
    $
    33
    
    
    $
    2,356
    
    
    $
    2,389Amounts utilized
    
    
    
    
    
    
    (1,017
    )
    
    
    (1,017
    )Adjustments
    
    
    
    
    
    
    136
    
    
    
    136Balance, September 30, 2008
    
    $
    33
    
    
    $
    1,475
    
    
    $
    1,508
  9




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##### Table of Contents



2006 Restructuring Plan
 Personnel Costs
    
    
    Lease Costs
    
    
    TotalBalance, December 31, 2007
    
    $
    833
    
    
    $
    3,712
    
    
    $
    4,545Amounts utilized
    
    
    (281
    )
    
    
    (977
    )
    
    
    (1,258
    )Adjustments
    
    
    (443
    )
    
    
    122
    
    
    
    (321
    )Balance, September 30, 2008
    
    $
    109
    
    
    $
    2,857
    
    
    $
    2,966
  8. ACCRUED OTHER EXPENSES
  September 30,
    
    
    December 31,2008
    
    
    2007Accrued service fees payable
    
    $
    3,488
    
    
    $
    3,190Accrued third party products and royalties
    
    
    1,528
    
    
    
    1,359Sales and income taxes payable
    
    
    3,642
    
    
    
    1,035Accrued contract losses
    
    
    214
    
    
    
    720Other
    
    
    3,790
    
    
    
    1,894Total
    
    $
    12,662
    
    
    $
    8,198
 9. CONTINGENCIES AND DEBT
 Litigation
 Guarantees
  10




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##### Table of Contents



Long-term Debt
 September 30,
    
    
    December 31,2008
    
    
    2007Capital leases
    
    $
    4,366
    
    
    $
    7,030Note payable on property
    
    
    5,161
    
    
    
    5,214Other notes payable
    
    
    218
    
    
    
    286Total debt
    
    $
    9,745
    
    
    $
    12,530Less current portion
    
    
    (3,153
    )
    
    
    (3,725
    )Total long-term debt
    
    $
    6,592
    
    
    $
    8,805
 10. INCOME TAXES
    11. STOCK OPTION PLANS
    11




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##### Table of Contents



Nine months ended
September 30,2008
    
    
    2007Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    44.4
    %
    
    
    45.0
    %Risk-free interest rate
    
    
    3.2
    %
    
    
    4.9
    %Expected life
    
    4.4 years
    
    
    4.0 years
  As of September 30,2008
    
    
    2007Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    45.0
    %
    
    
    44.0
    %Risk-free interest rate
    
    
    2.0
    %
    
    
    3.9
    %Expected life
    
    2.8 years
    
    
    3.9 years
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Direct and operating expenses:Cost of professional services,
support and maintenance
    
    $
    31
    
    
    $
    180
    
    
    $
    104
    
    
    $
    458Cost of data center
    
    
    29
    
    
    
    12
    
    
    
    76
    
    
    
    47Selling and marketing
    
    
    (5
    )
    
    
    1,478
    
    
    
    1,601
    
    
    
    3,892Product development
    
    
    15
    
    
    
    644
    
    
    
    599
    
    
    
    1,651General and administrative
    
    
    342
    
    
    
    575
    
    
    
    2,225
    
    
    
    1,854Total stock-based compensation expense
    
    $
    412
    
    
    $
    2,889
    
    
    $
    4,605
    
    
    $
    7,902
  Unrecognized
    
    
    WeightedExpense
    
    
    Average Period(in thousands)
    
    
    (in years)Stock Options
    
    $
    5,523
    
    
    
    1.4Restricted Stock
    
    
    1,163
    
    
    
    1.1Stock Appreciation Rights
    
    
    156
    
    
    
    0.1
  12




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##### Table of Contents



12. STOCKHOLDERS EQUITY
  13. SEGMENT REPORTING AND MAJOR CUSTOMERS
    Three Months Ended September 30, 2008
    
    
    Three Months Ended September 30, 2007Enterprise
    
    
    Postilion
    
    
    Total
    
    
    Enterprise
    
    
    Postilion
    
    
    TotalRevenues:Software license
    
    $
    1,620
    
    
    $
    7,509
    
    
    
    9,129
    
    
    $
    1,774
    
    
    $
    6,517
    
    
    $
    8,291Support and maintenance
    
    
    4,192
    
    
    
    8,052
    
    
    
    12,244
    
    
    
    4,030
    
    
    
    7,665
    
    
    
    11,695Professional services
    
    
    19,737
    
    
    
    5,168
    
    
    
    24,905
    
    
    
    15,709
    
    
    
    3,717
    
    
    
    19,426Data center
    
    
    7,107
    
    
    
    4,973
    
    
    
    12,080
    
    
    
    6,301
    
    
    
    5,346
    
    
    
    11,647Other revenue
    
    
    250
    
    
    
    41
    
    
    
    291
    
    
    
    152
    
    
    
    103
    
    
    
    255Total revenue
    
    $
    32,906
    
    
    $
    25,743
    
    
    $
    58,649
    
    
    $
    27,966
    
    
    $
    23,348
    
    
    $
    51,314Operating expenses:Direct costs
    
    
    15,965
    
    
    
    11,138
    
    
    
    27,103
    
    
    
    13,971
    
    
    
    10,370
    
    
    
    24,341Selling and marketing
    
    
    3,643
    
    
    
    4,717
    
    
    
    8,360
    
    
    
    3,085
    
    
    
    4,893
    
    
    
    7,978Product development
    
    
    4,584
    
    
    
    3,074
    
    
    
    7,658
    
    
    
    3,127
    
    
    
    3,230
    
    
    
    6,357General and administrative
    
    
    3,202
    
    
    
    2,892
    
    
    
    6,094
    
    
    
    3,707
    
    
    
    2,632
    
    
    
    6,339Depreciation
    
    
    1,127
    
    
    
    847
    
    
    
    1,974
    
    
    
    1,016
    
    
    
    595
    
    
    
    1,611Amortization of
other intangible assets
    
    
    
    
    
    
    283
    
    
    
    283
    
    
    
    
    
    
    
    282
    
    
    
    282Total operating expenses
    
    
    28,521
    
    
    
    22,951
    
    
    
    51,472
    
    
    
    24,906
    
    
    
    22,002
    
    
    
    46,908Operating income
    
    $
    4,385
    
    
    $
    2,792
    
    
    $
    7,177
    
    
    $
    3,060
    
    
    $
    1,346
    
    
    $
    4,406
  13




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##### Table of Contents



Nine Months Ended September 30, 2008
    
    
    Nine Months Ended September 30, 2007Enterprise
    
    
    Postilion
    
    
    Total
    
    
    Enterprise
    
    
    Postilion
    
    
    TotalRevenues:Software license
    
    $
    5,462
    
    
    $
    21,061
    
    
    
    26,523
    
    
    $
    4,116
    
    
    $
    17,692
    
    
    $
    21,808Support and maintenance
    
    
    12,412
    
    
    
    24,120
    
    
    
    36,532
    
    
    
    11,418
    
    
    
    21,979
    
    
    
    33,397Professional services
    
    
    54,932
    
    
    
    14,700
    
    
    
    69,632
    
    
    
    48,485
    
    
    
    12,054
    
    
    
    60,539Data center
    
    
    21,077
    
    
    
    15,191
    
    
    
    36,268
    
    
    
    18,095
    
    
    
    16,982
    
    
    
    35,077Other revenue
    
    
    583
    
    
    
    272
    
    
    
    855
    
    
    
    465
    
    
    
    192
    
    
    
    657Total revenue
    
    $
    94,466
    
    
    $
    75,344
    
    
    $
    169,810
    
    
    $
    82,579
    
    
    $
    68,899
    
    
    $
    151,478Operating expenses:Direct costs
    
    
    46,028
    
    
    
    31,695
    
    
    
    77,723
    
    
    
    42,281
    
    
    
    29,077
    
    
    
    71,358Selling and marketing
    
    
    11,614
    
    
    
    14,305
    
    
    
    25,919
    
    
    
    9,814
    
    
    
    13,329
    
    
    
    23,143Product development
    
    
    13,154
    
    
    
    8,286
    
    
    
    21,440
    
    
    
    9,107
    
    
    
    9,160
    
    
    
    18,267General and administrative
    
    
    10,141
    
    
    
    8,771
    
    
    
    18,912
    
    
    
    11,465
    
    
    
    9,283
    
    
    
    20,748Depreciation
    
    
    3,392
    
    
    
    2,445
    
    
    
    5,837
    
    
    
    3,377
    
    
    
    1,805
    
    
    
    5,182Amortization of
other intangible assets
    
    
    
    
    
    
    848
    
    
    
    848
    
    
    
    45
    
    
    
    847
    
    
    
    892Total operating expenses
    
    
    84,329
    
    
    
    66,350
    
    
    
    150,679
    
    
    
    76,089
    
    
    
    63,501
    
    
    
    139,590Operating income
    
    $
    10,137
    
    
    $
    8,994
    
    
    $
    19,131
    
    
    $
    6,490
    
    
    $
    5,398
    
    
    $
    11,888
 Geography
 Major Customer.
  14




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##### Table of Contents



14. NET INCOME PER COMMON SHARE
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands, except per share data)Basic earnings per share:Net Income
    
    $
    6,191
    
    
    $
    5,148
    
    
    $
    16,517
    
    
    $
    13,064Amount allocated to participating preferred stockholders
    
    
    (115
    )
    
    
    (92
    )
    
    
    (307
    )
    
    
    (227
    )Net income available to common stockholders
    
    $
    6,076
    
    
    $
    5,056
    
    
    $
    16,210
    
    
    $
    12,837Weighted average common shares outstanding
    
    
    56,560
    
    
    
    58,842
    
    
    
    56,578
    
    
    
    60,512Basic earnings per share
    
    $
    0.11
    
    
    $
    0.09
    
    
    $
    0.29
    
    
    $
    0.21Diluted earnings per share:Net income
    
    $
    6,191
    
    
    $
    5,148
    
    
    $
    16,517
    
    
    $
    13,064Amount allocated to participating preferred stockholders
    
    
    (115
    )
    
    
    (92
    )
    
    
    (307
    )
    
    
    (227
    )Net income available to common stockholders
    
    $
    6,076
    
    
    $
    5,056
    
    
    $
    16,210
    
    
    $
    12,837Weighted average common shares outstanding
    
    
    56,560
    
    
    
    58,842
    
    
    
    56,578
    
    
    
    60,512Weighted average effect of common stock equivalent
stock options and restricted stock
    
    
    1,083
    
    
    
    1,248
    
    
    
    836
    
    
    
    850Weighted average diluted shares outstanding
    
    
    57,643
    
    
    
    60,090
    
    
    
    57,414
    
    
    
    61,362Diluted earnings per share
    
    $
    0.11
    
    
    $
    0.08
    
    
    $
    0.28
    
    
    $
    0.21
  15




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Executive Overview
  Enterprise
    
    
    PostilionS1 Enterprise
    
    
    Postilion
    
    
    FSBSelf Service BankingOnline BankingPersonal Banking
    
    Global
    
    US
    
    
    Business Banking
    
    Global
    
    US
    
    
    Bill pay services
    
    US
    
    US
    
    
    Corporate Banking
    
    Global
    
    
    
    
    
    
    Trade Finance
    
    Global
    
    
    
    
    
    
    Mobile Banking
    
    Global
    
    Global
    
    
    Voice Banking
    
    Global
    
    US
    
    
    Full Service BankingTeller
    
    Global
    
    
    
    
    
    USSales and Service
    
    Global
    
    
    
    
    
    USCall Center
    
    Global
    
    
    
    
    
    USLending
    
    
    
    
    
    
    
    
    
    USPayments
    
    
    
    
    
    Global
    
    
    Insurance
    
    US
    
    
    
    
    
    
    
  16




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##### Table of Contents



Geography and Significant Customers
  Recent Accounting Pronouncements and Critical Accounting Policies and Estimates
   17




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##### Table of Contents



Stock-based Compensation Expense
 stock-based
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Direct and operating expenses:Cost of professional services,
support and maintenance
    
    $
    31
    
    
    $
    180
    
    
    $
    104
    
    
    $
    458Cost of data center
    
    
    29
    
    
    
    12
    
    
    
    76
    
    
    
    47Selling and marketing
    
    
    (5
    )
    
    
    1,478
    
    
    
    1,601
    
    
    
    3,892Product development
    
    
    15
    
    
    
    644
    
    
    
    599
    
    
    
    1,651General and administrative
    
    
    342
    
    
    
    575
    
    
    
    2,225
    
    
    
    1,854Total stock-based compensation expense
    
    $
    412
    
    
    $
    2,889
    
    
    $
    4,605
    
    
    $
    7,902
 Comparison of the Three Months Ended September 30, 2008 and 2007
 Revenue
 Three Months Ended September 30,Enterprise
    
    
    Postilion
    
    
    Total2008
    
    
    2007
    
    
    Chg
    
    
    2008
    
    
    2007
    
    
    Chg
    
    
    2008
    
    
    2007
    
    
    ChgRevenue:Software licenses
    
    $
    1,620
    
    
    $
    1,774
    
    
    
    -9
    %
    
    $
    7,509
    
    
    $
    6,517
    
    
    
    15
    %
    
    $
    9,129
    
    
    $
    8,291
    
    
    
    10
    %Support and maintenance
    
    
    4,192
    
    
    
    4,030
    
    
    
    4
    %
    
    
    8,052
    
    
    
    7,665
    
    
    
    5
    %
    
    
    12,244
    
    
    
    11,695
    
    
    
    5
    %Professional services
    
    
    19,737
    
    
    
    15,709
    
    
    
    26
    %
    
    
    5,168
    
    
    
    3,717
    
    
    
    39
    %
    
    
    24,905
    
    
    
    19,426
    
    
    
    28
    %Data center
    
    
    7,107
    
    
    
    6,301
    
    
    
    13
    %
    
    
    4,973
    
    
    
    5,346
    
    
    
    -7
    %
    
    
    12,080
    
    
    
    11,647
    
    
    
    4
    %Other
    
    
    250
    
    
    
    152
    
    
    
    n/m
    
    
    
    41
    
    
    
    103
    
    
    
    n/m
    
    
    
    291
    
    
    
    255
    
    
    
    n/mTotal revenues
    
    $
    32,906
    
    
    $
    27,966
    
    
    
    18
    %
    
    $
    25,743
    
    
    $
    23,348
    
    
    
    10
    %
    
    $
    58,649
    
    
    $
    51,314
    
    
    
    14
    %
   Three Months Ended 
September 30,2008
    
    
    2007Subscription revenue:Enterprise
    
    $
    751
    
    
    $
    625Postilion
    
    
    2,407
    
    
    
    1,633Total Company
    
    $
    3,158
    
    
    $
    2,258
  18




---



##### Table of Contents



19




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##### Table of Contents



Direct costs
 Three Months Ended September 30,Enterprise
    
    
    Postilion
    
    
    Total2008
    
    
    %
    
    
    2007
    
    
    %
    
    
    2008
    
    
    %
    
    
    2007
    
    
    %
    
    
    2008
    
    
    %
    
    
    
    
    
    
    2007
    
    
    %Direct costs:Cost of software licenses
    
    $
    236
    
    
    
    15
    %
    
    $
    318
    
    
    
    18
    %
    
    $
    691
    
    
    
    9
    %
    
    $
    657
    
    
    
    10
    %
    
    $
    927
    
    
    
    10
    %
    
    
    
    
    
    $
    975
    
    
    
    12
    %Cost of professional services,
support and maintenance
    
    
    11,696
    
    
    
    49
    %
    
    
    10,015
    
    
    
    51
    %
    
    
    7,709
    
    
    
    58
    %
    
    
    6,984
    
    
    
    61
    %
    
    
    19,405
    
    
    
    52
    %
    
    
    
    
    
    
    16,999
    
    
    
    55
    %Cost of data center
    
    
    3,911
    
    
    
    55
    %
    
    
    3,638
    
    
    
    58
    %
    
    
    2,728
    
    
    
    55
    %
    
    
    2,695
    
    
    
    50
    %
    
    
    6,639
    
    
    
    55
    %
    
    
    
    
    
    
    6,333
    
    
    
    54
    %Cost of other revenue
    
    
    122
    
    
    
    n/m
    
    
    
    
    
    
    
    n/m
    
    
    
    10
    
    
    
    n/m
    
    
    
    34
    
    
    
    n/m
    
    
    
    132
    
    
    
    n/m
    
    
    
    
    
    
    
    34
    
    
    
    n/mTotal direct costs
    
    $
    15,965
    
    
    
    49
    %
    
    $
    13,971
    
    
    
    50
    %
    
    $
    11,138
    
    
    
    43
    %
    
    $
    10,370
    
    
    
    44
    %
    
    $
    27,103
    
    
    
    46
    %
    
    
    
    
    
    $
    24,341
    
    
    
    47
    %
      20




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##### Table of Contents



Operating
expenses
 Three Months Ended September 30,Enterprise
    
    
    Postilion
    
    
    Total2008
    
    
    %
    
    
    2007
    
    
    %
    
    
    2008
    
    
    %
    
    
    2007
    
    
    %
    
    
    2008
    
    
    %
    
    
    2007
    
    
    %Operating expenses:Selling and marketing
    
    $
    3,643
    
    
    
    11
    %
    
    $
    3,085
    
    
    
    11
    %
    
    $
    4,717
    
    
    
    18
    %
    
    $
    4,893
    
    
    
    21
    %
    
    $
    8,360
    
    
    
    14
    %
    
    $
    7,978
    
    
    
    16
    %Product development
    
    
    4,584
    
    
    
    14
    %
    
    
    3,127
    
    
    
    11
    %
    
    
    3,074
    
    
    
    12
    %
    
    
    3,230
    
    
    
    14
    %
    
    
    7,658
    
    
    
    13
    %
    
    
    6,357
    
    
    
    12
    %General and administrative
    
    
    3,202
    
    
    
    10
    %
    
    
    3,707
    
    
    
    13
    %
    
    
    2,892
    
    
    
    11
    %
    
    
    2,632
    
    
    
    11
    %
    
    
    6,094
    
    
    
    10
    %
    
    
    6,339
    
    
    
    12
    %Depreciation
    
    
    1,127
    
    
    
    3
    %
    
    
    1,016
    
    
    
    4
    %
    
    
    847
    
    
    
    3
    %
    
    
    595
    
    
    
    3
    %
    
    
    1,974
    
    
    
    3
    %
    
    
    1,611
    
    
    
    3
    %Amortization of other
intangible assets
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    283
    
    
    
    1
    %
    
    
    282
    
    
    
    1
    %
    
    
    283
    
    
    
    0
    %
    
    
    282
    
    
    
    1
    %Total operating expenses
    
    $
    12,556
    
    
    
    38
    %
    
    $
    10,935
    
    
    
    39
    %
    
    $
    11,813
    
    
    
    46
    %
    
    $
    11,632
    
    
    
    50
    %
    
    $
    24,369
    
    
    
    42
    %
    
    $
    22,567
    
    
    
    44
    %Operating income
    
    $
    4,385
    
    
    
    13
    %
    
    $
    3,060
    
    
    
    11
    %
    
    $
    2,792
    
    
    
    11
    %
    
    $
    1,346
    
    
    
    6
    %
    
    $
    7,177
    
    
    
    12
    %
    
    $
    4,406
    
    
    
    9
    %
 Selling and marketing expenses
 Product development expenses
  General and administrative expenses
 Depreciation
 Amortization of other intangible assets
 Interest and other income, net
 Income tax expense
   21




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##### Table of Contents




    
    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; or
    
    if there are NOLs that were acquired as part of a business combination, upon which
we placed a valuation allowance at acquisition date. This results in non-cash income
tax expense as goodwill is reduced and the valuation allowance is released.
 Comparison of the Nine Months Ended September 30, 2008 and 2007
 Revenue
 Nine Months Ended September 30,Enterprise
    
    
    Postilion
    
    
    Total2008
    
    
    2007
    
    
    Chg
    
    
    2008
    
    
    2007
    
    
    Chg
    
    
    2008
    
    
    2007
    
    
    ChgRevenue:Software licenses
    
    $
    5,462
    
    
    $
    4,116
    
    
    
    33
    %
    
    $
    21,061
    
    
    $
    17,692
    
    
    
    19
    %
    
    $
    26,523
    
    
    $
    21,808
    
    
    
    22
    %Support and maintenance
    
    
    12,412
    
    
    
    11,418
    
    
    
    9
    %
    
    
    24,120
    
    
    
    21,979
    
    
    
    10
    %
    
    
    36,532
    
    
    
    33,397
    
    
    
    9
    %Professional services
    
    
    54,932
    
    
    
    48,485
    
    
    
    13
    %
    
    
    14,700
    
    
    
    12,054
    
    
    
    22
    %
    
    
    69,632
    
    
    
    60,539
    
    
    
    15
    %Data center
    
    
    21,077
    
    
    
    18,095
    
    
    
    16
    %
    
    
    15,191
    
    
    
    16,982
    
    
    
    -11
    %
    
    
    36,268
    
    
    
    35,077
    
    
    
    3
    %Other
    
    
    583
    
    
    
    465
    
    
    
    n/m
    
    
    
    272
    
    
    
    192
    
    
    
    n/m
    
    
    
    855
    
    
    
    657
    
    
    
    n/mTotal revenues
    
    $
    94,466
    
    
    $
    82,579
    
    
    
    14
    %
    
    $
    75,344
    
    
    $
    68,899
    
    
    
    9
    %
    
    $
    169,810
    
    
    $
    151,478
    
    
    
    12
    %
   22




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##### Table of Contents



Nine Months EndedSeptember 30,2008
    
    
    2007Subscription revenue:Enterprise
    
    $
    1,980
    
    
    $
    1,535Postilion
    
    
    6,569
    
    
    
    4,462Total Company
    
    $
    8,549
    
    
    $
    5,997
    23




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##### Table of Contents



Direct costs
 Nine Months Ended September 30,Enterprise
    
    
    Postilion
    
    
    Total2008
    
    
    %
    
    
    2007
    
    
    %
    
    
    2008
    
    
    %
    
    
    2007
    
    
    %
    
    
    2008
    
    
    %
    
    
    2007
    
    
    %Direct costs:Cost of software licenses
    
    $
    977
    
    
    
    18
    %
    
    $
    977
    
    
    
    24
    %
    
    $
    2,020
    
    
    
    10
    %
    
    $
    1,830
    
    
    
    10
    %
    
    $
    2,997
    
    
    
    11
    %
    
    $
    2,807
    
    
    
    13
    %Cost of professional services,
support and maintenance
    
    
    33,285
    
    
    
    49
    %
    
    
    30,586
    
    
    
    51
    %
    
    
    21,603
    
    
    
    56
    %
    
    
    19,137
    
    
    
    56
    %
    
    
    54,888
    
    
    
    52
    %
    
    
    49,723
    
    
    
    53
    %Cost of data center
    
    
    11,591
    
    
    
    55
    %
    
    
    10,652
    
    
    
    59
    %
    
    
    8,006
    
    
    
    53
    %
    
    
    7,870
    
    
    
    46
    %
    
    
    19,597
    
    
    
    54
    %
    
    
    18,522
    
    
    
    53
    %Cost of other revenue
    
    
    175
    
    
    
    n/m
    
    
    
    66
    
    
    
    n/m
    
    
    
    66
    
    
    
    n/m
    
    
    
    240
    
    
    
    n/m
    
    
    
    241
    
    
    
    n/m
    
    
    
    306
    
    
    
    n/mTotal direct costs
    
    $
    46,028
    
    
    
    49
    %
    
    $
    42,281
    
    
    
    51
    %
    
    $
    31,695
    
    
    
    42
    %
    
    $
    29,077
    
    
    
    42
    %
    
    $
    77,723
    
    
    
    46
    %
    
    $
    71,358
    
    
    
    47
    %
      24




---



##### Table of Contents



Operating expenses.
 Nine Months Ended September 30,Enterprise
    
    
    Postilion
    
    
    Total2008
    
    
    %
    
    
    2007
    
    
    %
    
    
    2008
    
    
    %
    
    
    2007
    
    
    %
    
    
    2008
    
    
    %
    
    
    2007
    
    
    %Operating expenses:Selling and marketing
    
    $
    11,614
    
    
    
    12
    %
    
    $
    9,814
    
    
    
    12
    %
    
    $
    14,305
    
    
    
    19
    %
    
    $
    13,329
    
    
    
    19
    %
    
    $
    25,919
    
    
    
    15
    %
    
    $
    23,143
    
    
    
    15
    %Product development
    
    
    13,154
    
    
    
    14
    %
    
    
    9,107
    
    
    
    11
    %
    
    
    8,286
    
    
    
    11
    %
    
    
    9,160
    
    
    
    13
    %
    
    
    21,440
    
    
    
    13
    %
    
    
    18,267
    
    
    
    12
    %General and administrative
    
    
    10,141
    
    
    
    11
    %
    
    
    11,465
    
    
    
    14
    %
    
    
    8,771
    
    
    
    12
    %
    
    
    9,283
    
    
    
    13
    %
    
    
    18,912
    
    
    
    11
    %
    
    
    20,748
    
    
    
    14
    %Depreciation
    
    
    3,392
    
    
    
    4
    %
    
    
    3,377
    
    
    
    4
    %
    
    
    2,445
    
    
    
    3
    %
    
    
    1,805
    
    
    
    3
    %
    
    
    5,837
    
    
    
    3
    %
    
    
    5,182
    
    
    
    3
    %Amortization of other
intangible assets
    
    
    
    
    
    
    0
    %
    
    
    45
    
    
    
    0
    %
    
    
    848
    
    
    
    1
    %
    
    
    847
    
    
    
    1
    %
    
    
    848
    
    
    
    0
    %
    
    
    892
    
    
    
    1
    %Total operating expenses
    
    $
    38,301
    
    
    
    41
    %
    
    $
    33,808
    
    
    
    41
    %
    
    $
    34,655
    
    
    
    46
    %
    
    $
    34,424
    
    
    
    50
    %
    
    $
    72,956
    
    
    
    43
    %
    
    $
    68,232
    
    
    
    45
    %Operating income
    
    $
    10,137
    
    
    
    11
    %
    
    $
    6,490
    
    
    
    8
    %
    
    $
    8,994
    
    
    
    12
    %
    
    $
    5,398
    
    
    
    8
    %
    
    $
    19,131
    
    
    
    11
    %
    
    $
    11,888
    
    
    
    8
    %
 Selling and marketing expenses
 Product development expenses
  General and administrative expenses
 Depreciation
 Amortization of other intangible assets
  25




---



##### Table of Contents



Interest and other income, net
 Income tax expense
    
    
    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; or
    
    if there are NOLs that were acquired as part of a business combination, upon which
we placed a valuation allowance at acquisition date. This results in non-cash income
tax expense as goodwill is reduced and the valuation allowance is released.
 Liquidity and Capital Resources
  Nine
Months ended September 30,2008
    
    
    2007Net cash provided by operating activities before
changes in operating assets and liabilities
    
    $
    29,532
    
    
    $
    29,227Change in operating assets and liabilities
    
    
    1,622
    
    
    
    (11,334
    )Net cash provided by operating activities
    
    
    31,154
    
    
    
    17,893Net cash provided by investing activities
    
    
    13,840
    
    
    
    8,356Net cash used in financing activities
    
    
    (12,262
    )
    
    
    (27,902
    )Effect of exchange rates on cash and cash equivalents
    
    
    (2,357
    )
    
    
    579Net increase (decrease) in cash and cash equivalents
    
    $
    30,375
    
    
    $
    (1,074
    )
  26




---



##### Table of Contents



As ofSeptember 30,2008
    
    
    December 31,2007Cash and cash equivalents
    
    $
    75,386
    
    
    $
    45,011Short term investments
    
    
    6,454
    
    
    
    23,855Working capital
    
    
    70,080
    
    
    
    64,318Total assets
    
    
    292,243
    
    
    
    281,844Total stockholders equity
    
    
    218,223
    
    
    
    209,905
 Operating Activities
  
    
    net income of $16.5 million;
    
    depreciation and amortization expense of $8.8 million;
    
    stock based compensation expense of $4.6 million;
    
    an increase of $3.6 million in accounts receivable and an increase of $2.1
million in deferred revenue primarily due to sales growth while our days sales
outstanding improved from 67 days to 64 days; and
    
    an increase of taxes payable mainly for foreign jurisdictions of $2.9 million.
  
    
    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;
    
    a decrease in accrued expenses and other liabilities of $11.8 million primarily
due to payments made from the restructuring reserve and bonus payments;
    
    a decrease of $5.1 million in accounts receivable due to the improvement of days
sales outstanding to 85 days from 95 days; and
    
    a decrease in deferred revenues for professional service projects of $4.0 million
offset partially by an increase of $2.3 million in software licenses revenues.
 Investing Activities
  
    
    converted $17.4 million, net, from short-term investments to cash and cash
equivalents;
    
    received $3.7 million from the release of escrow related to the sale of our Risk
and Compliance segment in August 2006; and
    
    purchased $7.3 million of property and equipment for hardware, software and
building improvements.
  
    
    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.
  27




---



##### Table of Contents



Financing Activities
  
    
    paid $10.2 million for the repurchase of our common stock pursuant to an
authorized stock repurchase program;
    
    received $0.7 million from the sale of common stock under our employee stock
option plans less payments for the exercise of stock appreciation rights; and
    
    paid $2.8 million for capital lease and debt obligations.
  
    
    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 $2.6 million for capital lease obligations and debt obligations.
 Investments
 Stock
Repurchase Program
 Restructuring
 Stock Appreciation Rights Awards
 Capital Requirements
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
   28




---



##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls
 Changes
in Internal Control over Financial Reporting
  29




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  You should consider carefully the Risk Factors. 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 expect that the revenue we generate from our largest customer, State Farm, will decrease
over the next three years as our work efforts for them conclude by the end of 2011 which may cause
our financial performance to suffer
  Our business may be adversely impacted by U.S. and global market and economic conditions
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Purchases of Equity Securities by the Issuer and Affiliated Purchasers
   30




---



##### Table of Contents



Total number of
    
    
    Maximum numbershares purchased
    
    
    of shares that mayTotal number
    
    
    
    
    
    
    as part of a publicly
    
    
    yet be purchasedof shares
    
    
    Average price
    
    
    announced plan or
    
    
    under the plan orPeriod
    
    purchased
    
    
    paid per share
    
    
    program
    
    
    programJuly 1, 2008 - July 31, 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    August 1, 2008 - August 31, 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    September 1, 2008 - September 30, 2008
    
    
    1,316,857
    
    
    $
    6.38
    
    
    
    1,316,857
    
    
    
    2,683,143Total
    
    
    1,316,857
    
    
    $
    6.38
    
    
    
    1,316,857
 
 Item 6. Exhibits
 ExhibitNo.
    
    Exhibit Description3.1
    
    
    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
September 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 Officer31.2
    
    
    Certification of Principal Accounting Officer32.1
    
    
    Certificate of Chief Executive Officer pursuant to §906 of the Sarbanes-Oxley Act of 200232.2
    
    
    Certificate of Principal Accounting Officer pursuant to §906 of the Sarbanes-Oxley Act of 2002
  31




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##### Table of Contents



SIGNATURE
  S1 CORPORATIONBy:
    /s/ STEPHEN M. DEXTERStephen M. DexterVice President and Corporate Controller
(Principal Accounting Officer)  32




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Exhibit Description31.1
    
    
    Certification of Chief Executive Officer31.2
    
    
    Certification of Principal Accounting Officer32.1
    
    
    Certificate of Chief Executive Officer pursuant to §906 of the Sarbanes-Oxley Act of 200232.2
    
    
    Certificate of Principal Accounting Officer pursuant to §906 of the Sarbanes-Oxley Act of 2002
  33