##### 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 March 31, 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. Employerincorporation or organization)
    
    Identification No.)
 705 Westech DriveNorcross, GA
    
    30092(Address of principal executive
    
    (Zip Code)offices)
 (404) 923-3500
 (Former name if changed since last report.)
 þ o
  o þ o
 o þ




---



##### 



S1 CORPORATION
QUARTERLY PERIOD ENDED MARCH 31, 2007
TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006Notes to Condensed Consolidated Financial Statements as of March 31, 2007Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II  OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Purchases of Equity SecuritiesItem 6. ExhibitsSignatureEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
  1




---



##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 Item 1  Financial Statements
 S1 CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (IN THOUSANDS, EXCEPT SHARE DATA)
 March 31,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    83,332
    
    
    $
    69,612Short-term investments
    
    
    8,179
    
    
    
    21,392Accounts receivable, net
    
    
    48,650
    
    
    
    53,371Prepaid expenses
    
    
    3,953
    
    
    
    4,036Other current assets
    
    
    5,434
    
    
    
    2,308Total current assets
    
    
    149,548
    
    
    
    150,719Property and equipment, net
    
    
    10,706
    
    
    
    12,137Intangible assets, net
    
    
    11,757
    
    
    
    12,903Goodwill, net
    
    
    125,294
    
    
    
    125,300Other assets
    
    
    6,415
    
    
    
    6,746Total assets
    
    $
    303,720
    
    
    $
    307,805LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,073
    
    
    $
    3,750Accrued compensation and
benefits
    
    
    7,057
    
    
    
    9,642Accrued restructuring
    
    
    6,819
    
    
    
    9,092Accrued other expenses
    
    
    10,699
    
    
    
    12,801Deferred revenues
    
    
    24,954
    
    
    
    29,265Current portion of capital lease obligation
    
    
    2,888
    
    
    
    2,942Total current liabilities
    
    
    55,490
    
    
    
    67,492Capital lease obligation, excluding current
portion
    
    
    3,220
    
    
    
    3,865Accrued restructuring, excluding current portion
    
    
    9,585
    
    
    
    10,386Other liabilities
    
    
    5,613
    
    
    
    1,833Total liabilities
    
    
    73,908
    
    
    
    83,576Stockholders equity:Preferred stock
    
    
    10,000
    
    
    
    10,000Common stock
    
    
    616
    
    
    
    613Additional paid-in capital
    
    
    1,848,040
    
    
    
    1,845,529Accumulated deficit
    
    
    (1,626,335
    )
    
    
    (1,629,302
    )Accumulated other comprehensive loss:Net loss on derivative financial instruments,
net of tax
    
    
    (159
    )
    
    
    (168
    )Cumulative foreign currency translation
adjustment, net of tax
    
    
    (2,350
    )
    
    
    (2,443
    )Total stockholders equity
    
    
    229,812
    
    
    
    224,229Total liabilities and stockholders equity
    
    $
    303,720
    
    
    $
    307,805Preferred shares issued and
outstanding
    
    
    749,064
    
    
    
    749,064Common shares issued and
outstanding
    
    
    61,627,870
    
    
    
    61,290,973
  2




---



##### Table of Contents



S1 CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 (Unaudited)
 Three Months EndedMarch 31,2007
    
    
    2006Revenues:Software licenses
    
    $
    5,761
    
    
    $
    6,043Support and maintenance
    
    
    10,476
    
    
    
    10,657Professional services
    
    
    19,432
    
    
    
    14,621Data center
    
    
    11,700
    
    
    
    11,586Other
    
    
    197
    
    
    
    533Total revenues
    
    
    47,566
    
    
    
    43,440Operating expenses:Cost of software licenses
    
    
    892
    
    
    
    1,030Cost of professional services, support and maintenance
    
    
    14,953
    
    
    
    14,690Cost of data center
    
    
    5,958
    
    
    
    5,416Cost of other revenue
    
    
    142
    
    
    
    316Selling and marketing
    
    
    7,398
    
    
    
    5,875Product development
    
    
    6,894
    
    
    
    9,607General and administrative
    
    
    6,699
    
    
    
    5,716Restructuring costs
    
    
    
    
    
    
    333Depreciation
    
    
    1,834
    
    
    
    1,752Amortization of other intangible assets
    
    
    327
    
    
    
    327Total operating expenses
    
    
    45,097
    
    
    
    45,062Operating income (loss)
    
    
    2,469
    
    
    
    (1,622
    )Interest and other income, net
    
    
    871
    
    
    
    1,209Income (loss) before income tax expense
    
    
    3,340
    
    
    
    (413
    )Income tax expense
    
    
    (373
    )
    
    
    (391
    )Income (loss) from continuing operations
    
    
    2,967
    
    
    
    (804
    )Gain from discontinued operations, net of tax
    
    
    
    
    
    
    360Net income (loss)
    
    $
    2,967
    
    
    $
    (444
    )Basic earnings (loss) per share:Continuing operations
    
    $
    0.05
    
    
    $
    (0.01
    )Discontinued operations
    
    
    
    
    
    
    Net income (loss) per share
    
    $
    0.05
    
    
    $
    (0.01
    )Diluted earnings (loss) per share:Continuing operations
    
    $
    0.05
    
    
    $
    (0.01
    )Discontinued operations
    
    
    
    
    
    
    Net income (loss) per share
    
    $
    0.05
    
    
    $
    (0.01
    )Weighted average common shares outstanding  basic
    
    
    61,505,306
    
    
    
    70,422,757Weighted average common shares outstanding  fully diluted
    
    
    61,801,948
    
    
    
    n/a
  3




---



##### Table of Contents



S1 CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (Unaudited)
 Three Months EndedMarch 31,2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    2,967
    
    
    $
    (444
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    2,980
    
    
    
    3,121Gain from discontinued operations, net of tax
    
    
    
    
    
    
    (554
    )Provision for doubtful accounts receivable and billing adjustments
    
    
    682
    
    
    
    570Stock based compensation expense
    
    
    1,905
    
    
    
    1,576Changes in assets and liabilities, excluding effects of acquisitions:Decrease (increase) in accounts receivable
    
    
    4,076
    
    
    
    (4,330
    )Increase in prepaid expenses and other assets
    
    
    (2,703
    )
    
    
    (1,090
    )Decrease in accounts payable
    
    
    (640
    )
    
    
    (528
    )Decrease in accrued expenses and other liabilities
    
    
    (4,806
    )
    
    
    (6,344
    )(Decrease) increase in deferred revenues
    
    
    (4,274
    )
    
    
    9,036Net cash provided by operating activities
    
    
    187
    
    
    
    1,013Cash flows from investing activities:Cash paid in connection with acquisition of businesses
    
    
    
    
    
    
    (14,000
    )Maturities of short-term investment securities
    
    
    21,076
    
    
    
    20,900Purchases of short-term investment securities
    
    
    (7,863
    )
    
    
    (8,701
    )Proceeds from sale of subsidiary
    
    
    
    
    
    
    554Purchases of property, equipment and technology
    
    
    (403
    )
    
    
    (3,370
    )Net cash provided by (used in) investing activities
    
    
    12,810
    
    
    
    (4,617
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    1,403
    
    
    
    1,829Payments on capital lease obligations
    
    
    (699
    )
    
    
    (302
    )Net cash provided by financing activities
    
    
    704
    
    
    
    1,527Effect of exchange rate changes on cash and cash equivalents
    
    
    19
    
    
    
    92Net increase (decrease) in cash and cash equivalents
    
    
    13,720
    
    
    
    (1,985
    )Cash and cash equivalents at beginning of period
    
    
    69,612
    
    
    
    85,108Cash and cash equivalents at end of period
    
    $
    83,332
    
    
    $
    83,123
  4




---



##### Table of Contents



S1 CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. BACKGROUND AND BASIS OF PRESENTATION
      5




---



##### Table of Contents



2. RECENT ACCOUNTING PRONOUNCEMENTS AND SIGNIFICANT ACCOUNTING POLICIES
 Recent accounting pronouncements
      6




---



##### Table of Contents



Significant Accounting Policies
  3. ACQUISITIONS
  4. DISCONTINUED OPERATIONS
    Three Months EndedMarch 31,2006Revenues from Risk and Compliance
    
    $
    5,097Pretax loss from Risk and Compliance
    
    $
    (238
    )Gain on disposal of Edify
    
    
    554Income tax benefit
    
    
    44Income from discontinued operations
    
    $
    360
 7




---



##### Table of Contents



5. GOODWILL AND OTHER INTANGIBLE ASSETS
  Gross
    
    
    AccumulatedCarrying Value
    
    
    Amortization(In thousands)Purchased and acquired technology
    
    $
    19,489
    
    
    $
    (14,371
    )Customer relationships
    
    
    12,000
    
    
    
    (5,361
    )Total
    
    $
    31,489
    
    
    $
    (19,732
    )
  2007
    
    2008
    
    2009
    
    2010
    
    2011Enterprise
    
    $
    662
    
    
    $
    85
    
    
    $
    
    
    
    $
    
    
    
    $
    Postilion
    
    $
    3,328
    
    
    $
    3,081
    
    
    $
    2,200
    
    
    $
    1,090
    
    
    $
    1,038
  Enterprise
    
    
    Postilion
    
    
    Total(In thousands)Balance, January 1, 2007
    
    $
    37,769
    
    
    $
    87,531
    
    
    $
    125,300Utilization of acquisition related
income tax benefits
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Balance, March 31, 2007
    
    $
    37,763
    
    
    $
    87,531
    
    
    $
    125,294
 6. STOCK OPTION PLANS
  8




---



##### Table of Contents



2007
    
    2006Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    46
    %
    
    
    52
    %Risk-free interest rate
    
    
    5.0
    %
    
    
    4.7
    %Expected life
    
    4.0 years
    
    
    4.0 years
  2007
    
    2006Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    47
    %
    
    
    59
    %Risk-free interest rate
    
    
    5.0
    %
    
    
    4.6
    %Expected life
    
    4.4 years
    
    
    4.9 years
  Three Months Ended March 31,2007
    
    
    2006Costs and expenses:Professional services, support and maintenance
    
    $
    87
    
    
    $
    163Data center
    
    
    15
    
    
    
    35Selling and marketing
    
    
    919
    
    
    
    411Product development
    
    
    342
    
    
    
    396General and administrative
    
    
    542
    
    
    
    510Discontinued operations
    
    
    
    
    
    
    61Total stock-based compensation expense
    
    $
    1,905
    
    
    $
    1,576
  9




---



##### Table of Contents



7. COMPREHENSIVE INCOME (LOSS)
  Three Months EndedMarch 31,2007
    
    
    2006Net income (loss)
    
    $
    2,967
    
    
    $
    (444
    )Foreign currency translation adjustment
    
    
    93
    
    
    
    (106
    )Unrealized loss on cash flow hedges
    
    
    (9
    )
    
    
    (65
    )Comprehensive income (loss)
    
    $
    3,051
    
    
    $
    (615
    )
 8. DERIVATIVE FINANCIAL INSTRUMENTS
      Three Months EndedMarch 31, 2007Accumulated derivative net loss as of December 31, 2006
    
    $
    (168
    )Net change in fair value of derivatives
    
    
    (9
    )Net loss reclassified from AOCI into earnings
    
    
    18Accumulated derivative net loss as of March 31, 2007
    
    $
    (159
    )
 10




---



##### Table of Contents



9. RESTRUCTURING CHARGES
 2003 and Prior Restructuring Plans
  Lease CostsBalance, December 31, 2006
    
    $
    5,161Sublease income exceeding rental payments
    
    
    159Balance, March 31, 2007
    
    $
    5,320
 2005 Restructuring Plan
  Personnel Costs
    
    
    Lease Costs
    
    
    TotalBalance, December 31, 2006
    
    $
    660
    
    
    $
    3,645
    
    
    $
    4,305Amounts utilized
    
    
    (429
    )
    
    
    (211
    )
    
    
    (640
    )Balance, March 31, 2007
    
    $
    231
    
    
    $
    3,434
    
    
    $
    3,665
 2006 Restructuring Plan
  Personnel Costs
    
    
    Lease Costs
    
    
    TotalBalance, December 31, 2006
    
    $
    4,018
    
    
    $
    5,994
    
    
    $
    10,012Amounts utilized
    
    
    (2,229
    )
    
    
    (364
    )
    
    
    (2,593
    )Balance, March 31, 2007
    
    $
    1,789
    
    
    $
    5,630
    
    
    $
    7,419
  11




---



##### Table of Contents



10. CONTINGENCIES
 Litigation
   Guarantees
  11. INCOME TAXES
     12. EQUITY TRANSACTIONS
  12




---



##### Table of Contents



13. SEGMENT REPORTING, GEOGRAPHIC DISCLOSURES AND MAJOR CUSTOMERS
    Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalQuarter Ended
March 31, 2007:Enterprise
    
    $
    1,054
    
    
    $
    3,417
    
    
    $
    15,473
    
    
    $
    5,705
    
    
    $
    155
    
    
    $
    25,804Postilion
    
    
    4,707
    
    
    
    7,059
    
    
    
    3,959
    
    
    
    5,995
    
    
    
    42
    
    
    
    21,762Total
    
    $
    5,761
    
    
    $
    10,476
    
    
    $
    19,432
    
    
    $
    11,700
    
    
    $
    197
    
    
    $
    47,566Quarter Ended March
31, 2006:Enterprise
    
    $
    1,447
    
    
    $
    3,462
    
    
    $
    11,696
    
    
    $
    4,928
    
    
    $
    170
    
    
    $
    21,703Postilion
    
    
    4,596
    
    
    
    7,195
    
    
    
    2,925
    
    
    
    6,658
    
    
    
    363
    
    
    
    21,737Total
    
    $
    6,043
    
    
    $
    10,657
    
    
    $
    14,621
    
    
    $
    11,586
    
    
    $
    533
    
    
    $
    43,440
  Three Months Ended March 31, 2007Enterprise
    
    
    Postilion
    
    
    Total(in thousands)Revenues
    
    $
    25,804
    
    
    $
    21,762
    
    
    $
    47,566Operating expenses:Direct costs
    
    
    13,547
    
    
    
    8,398
    
    
    
    21,945Selling and marketing
    
    
    3,184
    
    
    
    4,214
    
    
    
    7,398Product development
    
    
    3,015
    
    
    
    3,879
    
    
    
    6,894General and administrative
    
    
    3,810
    
    
    
    2,889
    
    
    
    6,699Depreciation
    
    
    1,219
    
    
    
    615
    
    
    
    1,834Amortization of other intangible assets
    
    
    45
    
    
    
    282
    
    
    
    327Total operating expenses
    
    
    24,820
    
    
    
    20,277
    
    
    
    45,097Segment operating income
    
    $
    984
    
    
    $
    1,485
    
    
    $
    2,469
 Three Months Ended March 31, 2006Enterprise
    
    
    Postilion
    
    
    Total(in thousands)Revenues
    
    $
    21,703
    
    
    $
    21,737
    
    
    $
    43,440Operating expenses:Direct costs
    
    
    12,579
    
    
    
    8,873
    
    
    
    21,452Selling and marketing
    
    
    2,761
    
    
    
    3,114
    
    
    
    5.875Product development
    
    
    6,140
    
    
    
    3,467
    
    
    
    9,607General and administrative
    
    
    2,893
    
    
    
    2,823
    
    
    
    5,716Restructuring costs
    
    
    307
    
    
    
    26
    
    
    
    333Depreciation
    
    
    1,121
    
    
    
    631
    
    
    
    1,752Amortization of other intangible assets
    
    
    43
    
    
    
    284
    
    
    
    327Total operating expenses
    
    
    25,844
    
    
    
    19,218
    
    
    
    45,062Segment operating (loss) income
    
    $
    (4,141
    )
    
    $
    2,519
    
    
    $
    (1,622
    )
 13




---



##### Table of Contents



14. NET INCOME (LOSS) PER SHARE
    Three Months EndedMarch 31,2007
    
    
    2006(in thousands, except per share data)Basic earnings per share:Income (loss) from continuing operations
    
    $
    2,967
    
    
    $
    (804
    )Amount allocated to participating preferred stockholders
    
    
    (51
    )
    
    
    Income (loss) from continuing operations
available to common stockholders  basic
    
    $
    2,916
    
    
    $
    (804
    )Weighted average common shares outstanding
    
    
    61,505
    
    
    
    70,423Basic earnings (loss) from continuing operations per share
    
    $
    0.05
    
    
    $
    (0.01
    )Diluted earnings per share:Income (loss) from continuing operations
    
    $
    2,967
    
    
    $
    (804
    )Amount allocated to participating preferred stockholders
    
    
    (51
    )
    
    
    Income (loss) from continuing operations
available to common stockholders  diluted
    
    $
    2,916
    
    
    $
    (804
    )Weighted average common shares outstanding
    
    
    61,505
    
    
    
    70,423Weighted average effect of common stock equivalents:Stock options
    
    
    297
    
    
    
    Weighted average diluted shares outstanding
    
    
    61,802
    
    
    
    70,423Diluted earnings (loss) from continuing operations per share
    
    $
    0.05
    
    
    $
    (0.01
    )
 14




---



##### Table of Contents



15. SUBSEQUENT EVENTS
   15




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
      16




---



##### Table of Contents



Recent Accounting Pronouncements
      17




---



##### Table of Contents



Significant Accounting Policies
  Comparison of the Three Months Ended March 31, 2007 and 2006
 Revenues.
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalQuarter Ended
March 31, 2007:Enterprise
    
    $
    1,054
    
    
    $
    3,417
    
    
    $
    15,473
    
    
    $
    5,705
    
    
    $
    155
    
    
    $
    25,804Postilion
    
    
    4,707
    
    
    
    7,059
    
    
    
    3,959
    
    
    
    5,995
    
    
    
    42
    
    
    
    21,762Total
    
    $
    5,761
    
    
    $
    10,476
    
    
    $
    19,432
    
    
    $
    11,700
    
    
    $
    197
    
    
    $
    47,566Quarter Ended March
31, 2006:Enterprise
    
    $
    1,447
    
    
    $
    3,462
    
    
    $
    11,696
    
    
    $
    4,928
    
    
    $
    170
    
    
    $
    21,703Postilion
    
    
    4,596
    
    
    
    7,195
    
    
    
    2,925
    
    
    
    6,658
    
    
    
    363
    
    
    
    21,737Total
    
    $
    6,043
    
    
    $
    10,657
    
    
    $
    14,621
    
    
    $
    11,586
    
    
    $
    533
    
    
    $
    43,440
    18




---



##### Table of Contents



Direct Costs.
   19




---



##### Table of Contents



Selling and Marketing Expenses.
 Product Development Expenses.
  General and Administrative Expenses.
 Restructuring Costs.
 Depreciation.
 Amortization of Other Intangible Assets.
 Interest and Other Income, Net.
 Income Tax Expense.
 
    
    for tax expense in certain subsidiaries or jurisdictions for which 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 no 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; or
 20




---



##### Table of Contents




    
    if it is more likely than not a tax benefit cannot be sustained, tax expense is recorded
for the contingent tax liability.
  Gain from discontinued operations.
 Liquidity and Capital Resources
  Three Months Ended March 31,2007
    
    
    2006(In thousands)Net cash provided by operating activities before
changes in operating assets and liabilities
    
    $
    8,534
    
    
    $
    4,269Change in operating assets and liabilities
    
    
    (8,347
    )
    
    
    (3,256
    )Net cash provided by operating activities
    
    
    187
    
    
    
    1,013Net cash provided by (used in) investing activities
    
    
    12,810
    
    
    
    (4,617
    )Net cash used in financing activities
    
    
    704
    
    
    
    1,527Effect of exchange rates on cash and cash equivalents
    
    
    19
    
    
    
    92Net increase (decrease) in cash and cash equivalents
    
    $
    13,720
    
    
    $
    (1,985
    )
 As ofMarch 31, 2007
    
    December 31, 2006(In thousands)Cash and cash equivalents
    
    $
    83,332
    
    
    $
    69,612Short term investments
    
    
    8,179
    
    
    
    21,392Working capital
    
    
    94,058
    
    
    
    83,227Total assets
    
    
    303,720
    
    
    
    307,805Total stockholders equity
    
    
    229,812
    
    
    
    224,229
 Operating Activities.
  
    
    our net income of $3.0 million;
    
    depreciation and amortization expense of $3.0 million;
    
    provision of doubtful accounts receivable and billing adjustments of $0.7 million;
    
    stock based compensation expense of $1.9 million;
    
    a decrease in accrued expenses and other liabilities of $8.1 million as a result of
payments made from the restructuring reserve and payment of annual bonuses offset by
the accrual of stock appreciation rights expense;
 21




---



##### Table of Contents




    
    a decrease of $4.1 million in accounts receivable as a result of collections from our largest customer, and
    
    a $4.3 million decrease in deferred revenues due to work completion for one of our major customers.
  
    
    our net loss of $0.4 million;
    
    depreciation and amortization expense of $3.1 million;
    
    gain from discontinued operations of $0.6 million;
    
    provision of doubtful accounts receivable and billing adjustments of $0.6 million;
    
    stock based compensation expense of $1.6 million;
    
    a decrease in accrued expenses and other liabilities of $6.3 million as a result of
payments made from the restructuring reserve, payment of annual bonuses and payments
related to the sale of the Edify business;
    
    an increase of $4.3 million in accounts receivable due to the timing of revenue
recognized and billing terms on fixed price implementation projects during the quarter;
    
    a $9.0 million increase in deferred revenues resulting from annual billing of
maintenance and subscription fees; and
    
    changes in other operating assets and liabilities of $1.6 million.
 Investing Activities.
  
    
    converted $13.2 million, net, from short-term investments to cash and cash
equivalents lowering our short-term investments to $8.2 million, and
    
    purchased $0.4 million of property and equipment.
  
    
    paid $14.0 million to the sellers of Mosaic in settlement of the earn-out;
    
    converted $12.2 million, net, from short-term investments to cash and cash
equivalents lowering our short-term investments to $32.0 million;
    
    received a $0.6 million working capital adjustment from the sale of Edify; and
    
    purchased $3.4 million of property and equipment.
 Financing Activities.
  
    
    received $1.4 million from the sale of common stock under our employee stock option plans; and
    
    paid $0.7 million for capital lease obligations.
  
    
    received $1.8 million from the sale of common stock under our employee stock option plans; and
    
    paid $0.3 million for capital lease obligations.
   22




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls.
 Changes in Internal Control over Financial Reporting.
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
   
 Item 1A. Risk Factors
  23




---



##### Table of Contents



You should consider carefully the following risks. If any of the following 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.
 Our quarterly operating results may fluctuate and any fluctuations could adversely affect the price
of our common stock
  
    
    we cannot accurately predict the number and timing of contracts we will sign in a period, in part because
the budget constraints and internal review processes of existing and potential customers are not within our
control;
 
    
    as we will be selling our financial institutions products on both a perpetual license and a term or
subscription license, we cannot accurately predict the mix of perpetual licenses to term licenses sold in
any one quarter. Term licenses significantly reduce the amount of revenue recognized in the first year of
the contract, but is intended to increase the overall revenue earned from the customer during the typical
customer life cycle; perpetual license revenue can vary significantly on a quarterly basis;
 
    
    the length of our sales cycle to large financial organizations generally lasts from six to 18 months, which
adds an element of uncertainty to our ability to forecast revenues;
 
    
    if we fail to or are delayed in the introduction of new or enhanced products, or if our competitors
introduce new or enhanced products, sales of our products and services may not achieve expected levels
and/or may decline;
 
    
    our ability to expand the mix of distribution channels through which our products are sold may be limited;
 
    
    our products may not achieve widespread market acceptance, which could cause our revenues to be lower
than expected;
 
    
    we have had significant contracts with legacy customers that have decreased or terminated their services
and we may not be able to replace this revenue and / or the gross margins associated with this revenue;
 
    
    our sales may be constrained by the timing of releases of third-party software that works with our products;
 
    
    a significant percentage of our expenses is relatively fixed, and we may be unable to reduce expenses in
the short term if revenues decrease; and
 
    
    the migration of our license sales model to be more focused on recurring revenue contracts may result in
less predictable revenue due to an inability to predict the rate at which it is adopted by our customers,
or the rate at which it may be deferred.
 We have experienced substantial losses in the past and may not achieve or maintain profitable
operations in the future
  We
depend on one customer, State Farm Mutual Automotive 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
 24




---



##### Table of Contents



System failures or performance problems with our products could cause demand for these products to
decrease, require us to make significant capital expenditures or impair customer relations
  
    
    delays in completing and/or testing new products, resulting in significant delays in delivering new products;
 
    
    extraordinary end-user volumes or other events could cause systems to fail;
 
    
    our products could contain errors, or bugs, which could impair the services we provide;
 
    
    during the initial implementation of some products, we have experienced significant delays in implementing
and integrating software, and we may experience similar difficulties or delays in connection with future
implementations and upgrades to new versions; and
 
    
    many of our products require integration with third-party products and systems, and we may not be able to
integrate these products with new or existing products.
 We are subject to government regulation
  We are engaged in offshore software development activities, which may not be successful and which
may put our intellectual property at risk
  
    
    Communications and information flow may be less efficient and accurate as a consequence of the time zone
differences, distance and language differences between our primary development organization and the foreign based
activities, resulting in delays in development or errors in the software developed;
 
    
    potential disruption from the involvement of the United States in political and military conflicts around the world;
 25




---



##### Table of Contents




    
    the quality of the development efforts undertaken offshore may not meet our requirements because of language,
cultural and experience differences, resulting in potential product errors and/or delays;
 
    
    we have experienced a greater level of voluntary turnover of personnel in India than in other development centers
which could have an adverse impact on efficiency and timeliness of development as well as the opportunity for
misappropriation of our intellectual property;
 
    
    in addition to the risk of misappropriation of intellectual property from departing personnel, there is a general
risk of the potential for misappropriation of our intellectual property that might not be readily discoverable; and
 
    
    currency exchange rates could fluctuate and adversely impact the cost advantages intended from maintaining these
facilities.
 A significant portion of our customers are in a consolidating financial services industry, which is
subject to economic changes that could reduce demand for our products and services
  We are from time to time involved in litigation over proprietary rights, which may be costly and
time consuming
  
    
    be time-consuming to investigate and defend;
 
    
    result in costly litigation;
 
    
    cause product shipment delays;
 
    
    require us to enter into royalty or licensing agreements; or
 
    
    result in an injunction being issued against the use of our products.
  
    
    pay substantial damages;
 
    
    discontinue the use and sale of infringing products;
 
    
    expend significant resources to develop non-infringing technology; or
 
    
    obtain licenses to infringing technology.
 26




---



##### Table of Contents



Our operating results would suffer if we were subject to a protracted infringement claim or a
significant damage award
    
    
    costly litigation and damage awards;
 
    
    diversion of management attention and resources;
 
    
    product shipment delays or suspensions;
 
    
    injunction prohibiting us from selling our products; and
 
    
    the need to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, if at all.
 Acquisitions and divestitures may be costly and difficult to integrate / divest, divert management
resources or dilute stockholder value
  
    
    potential incompatibility of business cultures;
 
    
    potential delays in rationalizing diverse technology platforms;
 
    
    potential difficulties in coordinating geographically separated organizations;
 
    
    potential difficulties in re-training sales forces to market all of our products across all of our intended markets;
 
    
    potential difficulties implementing common internal business systems and processes;
 
    
    potential conflicts in third-party relationships; and
 27




---



##### Table of Contents




    
    the loss of key employees and diversion of the attention of management from other ongoing business concerns.
 Market volatility may affect the price of our common stock
  
    
    actual or anticipated variations in our quarterly operating results;
 
    
    27% of our common stock is owned by 3 institutions, a rapid change in position of any one
of these holders could cause a significant drop in our stock price if market demand is
insufficient to meet sales demand;
 
    
    announcements of new products, product enhancements, technological innovations or new
services by us or our competitors;
 
    
    changes in financial estimates by securities analysts;
 
    
    conditions or trends in the computer software, electronic commerce and Internet industries;
 
    
    changes in the market valuations of other technology companies;
 
    
    developments in Internet regulations;
 
    
    announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
 
    
    unscheduled system downtime of our products in either a hosted or in-house environment;
 
    
    security branches in our software or facilities may cause
harm to our business and reputation and result in a loss of customers;
 
    
    additions or departures of key personnel; and
 
    
    sales of our common stock or other securities in the open market.
 Future sales of our common stock in the public market could negatively affect our stock price
  Our market is highly competitive and if we are unable to keep pace with evolving technology our
revenue and future prospects may decline
  28




---



##### Table of Contents



International operations may adversely affect us
  
    
    fluctuations in currency exchange rates;
 
    
    governmental currency controls;
 
    
    changes in various regulatory requirements;
 
    
    political and economic changes and disruptions;
 
    
    difficulties in enforcing our contracts in foreign jurisdictions;
 
    
    export/import controls;
 
    
    tariff regulations;
 
    
    difficulties in staffing and managing foreign sales and support operations;
 
    
    greater difficulties in trade accounts receivable collection; and
 
    
    possible adverse tax consequences.
   Infringement of our proprietary technology could hurt our competitive position and income potential
  If we are unable to attract and retain highly skilled technical employees, we may not be able to
compete
  29




---



##### Table of Contents



The adoption or modification of laws or regulations relating to the Internet, or interpretations of
existing law, could adversely affect our business
  
 Item 2. Purchases of Equity Securities
  
 Item 6. Exhibits
 Exhibit No.
    
    Exhibit Description31.1
    
    Certification of Chief Executive Officer31.2
    
    Certification of Chief Financial Officer32.1
    
    Certificate of Chief Executive Officer pursuant to §906 of the Sarbanes -Oxley Act of 200232.2
    
    Certificate of Chief Financial Officer pursuant to §906 of the Sarbanes -Oxley Act of 2002
 30




---



##### Table of Contents



SIGNATURE
  S1 CORPORATIONBy:
    
    /s/ JOHN A. STONEJohn A. StoneChief Financial Officer(Principal Financial Officer andPrincipal Accounting Officer)
 
 31




---



##### Table of Contents



Exhibit Index
 Exhibit No.
    
    Exhibit Description31.1
    
    Certification of Chief Executive Officer31.2
    
    Certification of Chief Financial Officer32.1
    
    Certificate of Chief Executive Officer pursuant to §906 of the Sarbanes -Oxley
Act of 200232.2
    
    Certificate of Chief Financial Officer pursuant to §906 of the Sarbanes -Oxley
Act of 2002
 32