##### 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 June 30, 2006
 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.)3500 Lenox Road, Suite 200Atlanta, Georgia
    
    30326(Address of principal executive
    
    (Zip Code)offices)
 (404) 923-3500
 (Former name if changed since last report.)
 þ o
  o þ o
 o þ




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##### 



S1 CORPORATION
 QUARTERLY PERIOD ENDED JUNE 30, 2006
 TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements as of June 30, 2006
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    32PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    33Item 1A. Risk Factors
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    40Item 6. Exhibits
    
    
    41Signature
    
    
    42EX-10.1 CHANGE IN CONTROL SEVERANCE PLANEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO
  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)
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)



ASSETSCurrent assets:Cash and cash equivalents
    
    $
    79,227
    
    
    $
    85,108Short-term investments
    
    
    32,337
    
    
    
    44,170Accounts receivable, net
    
    
    56,291
    
    
    
    48,659Prepaid expenses
    
    
    4,381
    
    
    
    4,885Other current assets
    
    
    2,642
    
    
    
    3,870Assets of business held for sale, net
    
    
    9,106
    
    
    
    Total current assets
    
    
    183,984
    
    
    
    186,692Property and equipment, net
    
    
    12,851
    
    
    
    11,351Intangible assets, net
    
    
    15,369
    
    
    
    18,375Goodwill, net
    
    
    125,299
    
    
    
    125,808Other assets
    
    
    2,115
    
    
    
    2,297Total assets
    
    $
    339,618
    
    
    $
    344,523LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,617
    
    
    $
    5,292Accrued compensation and benefits
    
    
    7,038
    
    
    
    8,267Accrued restructuring
    
    
    4,868
    
    
    
    7,675Accrued other expenses
    
    
    11,469
    
    
    
    17,587Accrued purchase price consideration
    
    
    
    
    
    
    12,900Deferred revenues
    
    
    32,102
    
    
    
    27,499Current portion of capital lease obligation
    
    
    2,496
    
    
    
    1,222Liabilities of business held for sale, net
    
    
    10,229
    
    
    
    Total current liabilities
    
    
    73,819
    
    
    
    80,442Capital lease obligation, excluding current portion
    
    
    3,124
    
    
    
    791Accrued restructuring, excluding current portion
    
    
    6,027
    
    
    
    7,810Other liabilities
    
    
    2,278
    
    
    
    3,094Total liabilities
    
    
    85,248
    
    
    
    92,137Stockholders equity:Preferred stock
    
    
    10,000
    
    
    
    10,000Common stock
    
    
    750
    
    
    
    744Additional paid-in capital
    
    
    1,920,695
    
    
    
    1,915,617Common stock held in treasury  at cost
    
    
    (25,000
    )
    
    
    (25,000
    )Accumulated deficit
    
    
    (1,649,759
    )
    
    
    (1,647,204
    )Accumulated other comprehensive loss:Net (loss) gain on derivative financial instruments
    
    
    (109
    )
    
    
    104Cumulative foreign currency translation adjustment
    
    
    (2,207
    )
    
    
    (1,875
    )Total stockholders equity
    
    
    254,370
    
    
    
    252,386Total liabilities and stockholders equity
    
    $
    339,618
    
    
    $
    344,523Preferred shares issued and outstanding
    
    
    749,064
    
    
    
    749,064Common shares issued and outstanding
    
    
    75,041,591
    
    
    
    74,410,099Common stock held in treasury
    
    
    4,053,886
    
    
    
    4,053,886
  3




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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
    
    
    Six Months EndedJune 30,
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Software licenses
    
    $
    6,369
    
    
    $
    8,051
    
    
    $
    12,412
    
    
    $
    17,629Support and maintenance
    
    
    11,197
    
    
    
    11,383
    
    
    
    21,854
    
    
    
    22,983Professional services
    
    
    16,950
    
    
    
    17,840
    
    
    
    31,571
    
    
    
    36,221Data center
    
    
    11,911
    
    
    
    9,883
    
    
    
    23,497
    
    
    
    19,547Other
    
    
    312
    
    
    
    334
    
    
    
    845
    
    
    
    637Total revenues
    
    
    46,739
    
    
    
    47,491
    
    
    
    90,179
    
    
    
    97,017Operating expenses:Cost of software licenses
    
    
    1,062
    
    
    
    1,427
    
    
    
    2,092
    
    
    
    2,641Cost of professional services, support and maintenance (1) (2)
    
    
    15,761
    
    
    
    15,644
    
    
    
    30,451
    
    
    
    31,039Cost of data center (1) (2)
    
    
    5,759
    
    
    
    4,439
    
    
    
    11,175
    
    
    
    9,288Cost of other revenue
    
    
    133
    
    
    
    42
    
    
    
    449
    
    
    
    250Selling and marketing (2)
    
    
    6,683
    
    
    
    8,130
    
    
    
    12,558
    
    
    
    15,064Product development (2)
    
    
    9,876
    
    
    
    10,228
    
    
    
    19,483
    
    
    
    21,392General and administrative (2)
    
    
    6,479
    
    
    
    6,020
    
    
    
    12,195
    
    
    
    12,651Restructuring costs
    
    
    549
    
    
    
    
    
    
    
    882
    
    
    
    Depreciation
    
    
    1,971
    
    
    
    2,375
    
    
    
    3,723
    
    
    
    4,693Amortization of other intangible assets
    
    
    327
    
    
    
    328
    
    
    
    654
    
    
    
    657Total operating expenses
    
    
    48,600
    
    
    
    48,633
    
    
    
    93,662
    
    
    
    97,675Operating loss
    
    
    (1,861
    )
    
    
    (1,142
    )
    
    
    (3,483
    )
    
    
    (658
    )Interest and other income, net
    
    
    1,040
    
    
    
    816
    
    
    
    2,249
    
    
    
    1,015(Loss) income before income tax expense
    
    
    (821
    )
    
    
    (326
    )
    
    
    (1,234
    )
    
    
    357Income tax (expense) benefit
    
    
    (263
    )
    
    
    43
    
    
    
    (654
    )
    
    
    (329
    )(Loss) income from continuing operations
    
    
    (1,084
    )
    
    
    (283
    )
    
    
    (1,888
    )
    
    
    28(Loss) income from discontinued operations, net of tax (2)
    
    
    (1,027
    )
    
    
    2,599
    
    
    
    (667
    )
    
    
    3,008Net (loss) income
    
    $
    (2,111
    )
    
    $
    2,316
    
    
    $
    (2,555
    )
    
    $
    3,036Basic earnings per share:Continuing operations
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    0.00Discontinued operations
    
    $
    (0.01
    )
    
    $
    0.04
    
    
    $
    (0.01
    )
    
    $
    0.04Net (loss) income per share
    
    $
    (0.03
    )
    
    $
    0.03
    
    
    $
    (0.04
    )
    
    $
    0.04Diluted earnings per share:Continuing operations
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    0.00Discontinued operations
    
    $
    (0.01
    )
    
    $
    0.04
    
    
    $
    (0.01
    )
    
    $
    0.04Net (loss) income per share
    
    $
    (0.03
    )
    
    $
    0.03
    
    
    $
    (0.04
    )
    
    $
    0.04Weighted average common shares outstanding  basic
    
    
    70,958,696
    
    
    
    70,191,090
    
    
    
    70,692,207
    
    
    
    70,391,240Weighted average common shares outstanding  fully diluted
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    71,570,373
 
 (1)
    
    Cost of professional services, support and maintenance and cost of data center excludes charges
for depreciation.(2)
    
    Includes stock based compensation expense of: Cost of Professional services, support and maintenance
    
    $
    125
    
    
    $
    
    
    
    $
    287
    
    
    $
    Cost of Data center
    
    
    13
    
    
    
    
    
    
    
    48
    
    
    
    Selling and marketing
    
    
    345
    
    
    
    
    
    
    
    756
    
    
    
    Product development
    
    
    176
    
    
    
    
    
    
    
    571
    
    
    
    General and administrative
    
    
    475
    
    
    
    
    
    
    
    985
    
    
    
    Discontinued operations
    
    
    93
    
    
    
    
    
    
    
    156
    
    
    
    Total
    
    $
    1,227
    
    
    $
    
    
    
    $
    2,803
    
    
    $
    
  4




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S1 CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (Unaudited)
 Six Months EndedJune 30,2006
    
    
    2005Cash flows from operating activities:Net (loss) income
    
    $
    (2,555
    )
    
    $
    3,036Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:Depreciation and amortization
    
    
    6,479
    
    
    
    7,580Gain on disposal of Edify, net of tax
    
    
    (554
    )
    
    
    Provision for doubtful accounts receivable and billing adjustments
    
    
    1,918
    
    
    
    1,041Stock based compensation expense
    
    
    2,803
    
    
    
    Changes in assets and liabilities:Increase in accounts receivable
    
    
    (13,752
    )
    
    
    (4,405
    )(Increase) decrease in prepaid expenses and other assets
    
    
    (320
    )
    
    
    2,363Increase (decrease) in accounts payable
    
    
    900
    
    
    
    (1,536
    )Decrease in accrued expenses and other liabilities
    
    
    (9,725
    )
    
    
    (14,505
    )Increase in deferred revenues
    
    
    11,086
    
    
    
    8,329Net cash (used in) provided by operating activities
    
    
    (3,720
    )
    
    
    1,903Cash flows from investing activities:Cash paid in connection with acquisition of Mosaic businesses
    
    
    (14,000
    )
    
    
    Maturities of short-term investment securities
    
    
    26,900
    
    
    
    33,800Purchases of short-term investment securities
    
    
    (15,067
    )
    
    
    (21,171
    )Proceeds from sale of subsidiary
    
    
    554
    
    
    
    Purchases of property, equipment and technology
    
    
    (4,610
    )
    
    
    (3,229
    )Net cash (used in) provided by investing activities
    
    
    (6,223
    )
    
    
    9,400Cash flows from financing activities:Proceeds from employee stock option plans
    
    
    2,281
    
    
    
    309Payments on capital lease obligations
    
    
    (765
    )
    
    
    (973
    )Proceeds from sale-lease back transaction
    
    
    2,502
    
    
    
    Repurchase of common stock held in treasury
    
    
    
    
    
    
    (3,407
    )Net cash provided by (used in) financing activities
    
    
    4,018
    
    
    
    (4,071
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    44
    
    
    
    (474
    )Net (decrease) increase in cash and cash equivalents
    
    
    (5,881
    )
    
    
    6,758Cash and cash equivalents at beginning of period
    
    
    85,108
    
    
    
    43,223Cash and cash equivalents at end of period
    
    $
    79,227
    
    
    $
    49,981Noncash investing and financing activities:Property and equipment financed through capital leases
    
    $
    4,372
    
    
    $
    527
  5




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##### Table of Contents



S1 CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. BACKGROUND AND BASIS OF PRESENTATION
    
    
    presented the total assets of the Risk and Compliance business on one line as assets
of business held for sale in our consolidated balance sheet as of June 30, 2006;
    
    presented the total liabilities of the Risk and Compliance business on one line as
liabilities of business held for sale in our consolidated balance sheet as of June 30,
2006;
    
    presented the results of operations for the Risk and Compliance business as
discontinued operations on one line in our consolidated statements of operations for all
periods presented; and
    
    ceased depreciation of fixed assets and amortization of intangible assets associated
with the Risk and Compliance business from July 1, 2006 forward.
     6




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2. RECENT ACCOUNTING PRONOUNCEMENTS AND SIGNIFICANT ACCOUNTING POLICIES
 Recent accounting pronouncements
     7




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Stock-based compensation
     Six Months Ended June,2005
    
    2006Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    87.5
    %
    
    
    60.7
    %Risk-free interest rate
    
    
    3.9
    %
    
    
    4.8
    %Expected life
    
    4.0
    years
    
    4.0
    years
 8




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2006Loss from continuing operations
    
    $
    (1,134
    )
    
    $
    (2,647
    )Loss from discontinued operations
    
    
    (93
    )
    
    
    (156
    )Net loss
    
    $
    (1,227
    )
    
    $
    (2,803
    )
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2005Net income, as reported
    
    $
    2,316
    
    
    $
    3,036Add: Stock-based employee compensation expense
included in reported net income, net of
related tax effects
    
    
    
    
    
    
    Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    (2,927
    )
    
    
    (6,167
    )Pro forma net loss
    
    $
    (611
    )
    
    $
    (3,131
    )Basic and diluted net income (loss) per share:As reported  basic
    
    $
    0.03
    
    
    $
    0.04As reported  diluted
    
    
    0.03
    
    
    
    0.04Pro forma  basic and diluted
    
    
    (0.01
    )
    
    
    (0.04
    )
   9




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2006Costs and expenses:Cost of professional services, support and maintenance
    
    $
    125
    
    
    $
    287Cost of data center
    
    
    13
    
    
    
    48Selling and marketing
    
    
    345
    
    
    
    756Product development
    
    
    176
    
    
    
    571General and administrative
    
    
    475
    
    
    
    985Discontinued operations
    
    
    93
    
    
    
    156Total stock-based compensation expense
    
    $
    1,227
    
    
    $
    2,803
    3. DISCONTINUED OPERATIONS
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Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Risk and Compliance
    
    $
    5,161
    
    
    $
    6,995
    
    
    $
    10,258
    
    
    $
    12,947Edify
    
    
    
    
    
    
    8,018
    
    
    
    
    
    
    
    15,534Total
    
    
    5,161
    
    
    $
    15,013
    
    
    $
    10,258
    
    
    $
    28,481Pretax income (loss) from discontinued operations:Risk and Compliance
    
    $
    (1,019
    )
    
    $
    2,175
    
    
    $
    (1,257
    )
    
    $
    2,659Davidge
    
    
    
    
    
    
    (31
    )
    
    
    
    
    
    
    (31
    )Edify
    
    
    
    
    
    
    599
    
    
    
    
    
    
    
    631Gain (loss) on disposal of Edify
    
    
    
    
    
    
    
    
    
    
    554
    
    
    
    Income tax (expense) benefit
    
    
    (8
    )
    
    
    (144
    )
    
    
    36
    
    
    
    (251
    )(Loss) income from discontinued
operations
    
    $
    (1,027
    )
    
    $
    2,599
    
    
    $
    (667
    )
    
    $
    3,008
  Current assets
    
    $
    5,901Property and equipment, net
    
    
    1,027Other non-current assets
    
    
    134Intangible assets
    
    
    480Goodwill
    
    
    1,564Current liabilities
    
    
    (9,669
    )Long-term tax liabilities
    
    
    (560
    )Net liabilities of discontinued operation
    
    $
    (1,123
    )
 4. GOODWILL AND OTHER INTANGIBLE ASSETS
  Gross
    
    
    AccumulatedCarrying Value
    
    
    Amortization(In thousands)Purchased and acquired technology
    
    $
    19,489
    
    
    $
    (11,742
    )Customer relationships
    
    
    12,000
    
    
    
    (4,378
    )Total
    
    $
    31,489
    
    
    $
    (16,120
    )
  11




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2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010Enterprise
    
    $
    2,199
    
    
    $
    1,780
    
    
    $
    1,057
    
    
    $
    303
    
    
    $
    210Postilion
    
    $
    2,733
    
    
    $
    2,210
    
    
    $
    2,108
    
    
    $
    1,897
    
    
    $
    880
  Risk and ComplianceEnterprise
    
    
    Postilion
    
    
    (held for sale)
    
    
    Total(In thousands)Balance, January 1, 2006
    
    $
    66,064
    
    
    $
    58,186
    
    
    $
    1,558
    
    
    $
    125,808Additional consideration
    
    
    
    
    
    
    1,100
    
    
    
    
    
    
    
    1,100Utilization of acquisition related
income tax benefits
    
    
    (51
    )
    
    
    
    
    
    
    
    
    
    
    (51
    )Transferred to assets held for sale
    
    
    
    
    
    
    
    
    
    
    (1,558
    )
    
    
    (1,558
    )Balance, June 30, 2006
    
    $
    66,013
    
    
    $
    59,286
    
    
    $
    
    
    
    $
    125,299
 12




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##### Table of Contents



STOCK OPTION PLANS
   Weighted-Weighted-
    
    
    average
    
    
    Aggregateaverage
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Exercise
    
    
    Contractual
    
    
    Value(000)
    
    
    Price
    
    
    Life
    
    
    ($000)Outstanding at December 31, 2005
    
    
    14,932
    
    
    $
    9.40Granted
    
    
    456
    
    
    
    4.59Exercised
    
    
    (632
    )
    
    
    3.61
    
    
    
    
    
    
    $
    651Forfeited/canceled
    
    
    (973
    )
    
    
    11.31Outstanding at June 30, 2006
    
    
    13,783
    
    
    $
    9.37
    
    
    
    4.81
    
    
    $
    3,116Exercisable at June 30, 2006
    
    
    10,022
    
    
    $
    11.06
    
    
    
    3.26
    
    
    $
    1,076
   Non-Vested
    
    
    Weighted-Number of
    
    
    averageShares
    
    
    Grant-Date(000)
    
    
    Fair ValueNon-vested balance at December 31, 2005
    
    
    4,339
    
    
    $
    3.73Granted
    
    
    456
    
    
    $
    2.34Cancelled
    
    
    (385
    )
    
    $
    3.70Vested
    
    
    (649
    )
    
    $
    6.68Non-vested balance at June 30, 2006
    
    
    3,761
    
    
    $
    3.05
  13




---



##### Table of Contents



Options OutstandingWeighted-
    
    
    
    
    
    
    Options Exercisableaverage
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Number
    
    
    Remaining
    
    
    average
    
    
    Number
    
    
    averageOutstanding
    
    
    Contractual
    
    
    Exercise
    
    
    Exercisable
    
    
    ExerciseRange of Exercise Price
    
    
    (000)
    
    
    Life
    
    
    Price
    
    
    (000)
    
    
    Price$
    
    
    0.95  4.00
    
    
    
    1,114
    
    
    
    5.3
    
    
    $
    3.56
    
    
    
    744
    
    
    $
    3.534.01  5.00
    
    
    
    2,953
    
    
    
    8.4
    
    
    
    4.22
    
    
    
    446
    
    
    
    4.525.01  7.00
    
    
    
    2,610
    
    
    
    2.0
    
    
    
    6.33
    
    
    
    2,366
    
    
    
    6.447.01  8.50
    
    
    
    2,914
    
    
    
    4.4
    
    
    
    8.04
    
    
    
    2,412
    
    
    
    8.078.51  11.00
    
    
    
    648
    
    
    
    5.5
    
    
    
    9.34
    
    
    
    510
    
    
    
    9.3911.01  15.00
    
    
    
    695
    
    
    
    4.5
    
    
    
    13.10
    
    
    
    695
    
    
    
    13.1015.01  20.00
    
    
    
    2,492
    
    
    
    4.0
    
    
    
    16.73
    
    
    
    2,492
    
    
    
    16.7320.01  97.44
    
    
    
    357
    
    
    
    2.5
    
    
    
    44.78
    
    
    
    357
    
    
    
    44.670.95  97.44
    
    
    
    13,783
    
    
    
    4.8
    
    
    $
    9.37
    
    
    
    10,022
    
    
    $
    11.06
  6. COMPREHENSIVE (LOSS) INCOME
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net (loss) income
    
    $
    (2,111
    )
    
    $
    2,316
    
    
    $
    (2,555
    )
    
    $
    3,036Foreign currency translation adjustment
    
    
    (226
    )
    
    
    (357
    )
    
    
    (332
    )
    
    
    (1,043
    )Unrealized (loss) income on cash flow hedges
    
    
    (158
    )
    
    
    91
    
    
    
    (223
    )
    
    
    57Comprehensive (loss) income
    
    $
    (2,495
    )
    
    $
    2,050
    
    
    $
    (3,110
    )
    
    $
    2,050
 7. DERIVATIVE FINANCIAL INSTRUMENTS
    14




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##### Table of Contents



Three MonthsEndedJune 30, 2006Accumulated derivative net gain as of April 1, 2006
    
    $
    35Net change in fair value of derivatives
    
    
    (158
    )Net losses reclassified from AOCI into earnings
    
    
    14Accumulated derivative net loss as of June 30, 2006
    
    $
    (109
    )
 Six MonthsEndedJune 30, 2006Accumulated derivative net gain as of January 1, 2006
    
    $
    104Net change in fair value of derivatives
    
    
    (223
    )Net losses reclassified from AOCI into earnings
    
    
    10Accumulated derivative net loss as of June 30, 2006
    
    $
    (109
    )
  8. RESTRUCTURING CHARGES
  Lease CostsBalance at December 31, 2005
    
    $
    5,800Amounts utilized through June 30, 2006
    
    
    (526
    )Change in estimate
    
    
    (159
    )Balance at June 30, 2006
    
    $
    5,115
 15




---



##### Table of Contents



Personnel Costs
    
    
    Lease Costs
    
    
    TotalBalance at December 31, 2005
    
    $
    4,635
    
    
    $
    5,050
    
    
    $
    9,6852006 restructuring charge
    
    $
    333
    
    
    $
    
    
    
    $
    333Amounts utilized
    
    
    (3,576
    )
    
    
    (1,370
    )
    
    
    (4,946
    )Change in estimate
    
    
    
    
    
    
    708
    
    
    
    708Balance at June 30, 2006
    
    $
    1,392
    
    
    $
    4,388
    
    
    $
    5,780
   9. CONTINGENCIES
 Litigation
   Sale-Leaseback Transaction
  Guarantees
  16




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##### Table of Contents



10. SEGMENT REPORTING AND MAJOR CUSTOMERS
     Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalThree Months Ended June 30, 2006:Enterprise
    
    $
    2,591
    
    
    $
    6,353
    
    
    $
    14,207
    
    
    $
    5,079
    
    
    $
    100
    
    
    $
    28,330Postilion
    
    
    3,778
    
    
    
    4,844
    
    
    
    2,743
    
    
    
    6,832
    
    
    
    212
    
    
    
    18,409Total
    
    $
    6,369
    
    
    $
    11,197
    
    
    $
    16,950
    
    
    $
    11,911
    
    
    $
    312
    
    
    $
    46,739
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalThree Months Ended June 30, 2005:Enterprise
    
    $
    3,675
    
    
    $
    5,944
    
    
    $
    15,004
    
    
    $
    3,838
    
    
    $
    89
    
    
    $
    28,550Postilion
    
    
    4,376
    
    
    
    5,439
    
    
    
    2,836
    
    
    
    6,045
    
    
    
    245
    
    
    
    18,941Total
    
    $
    8,051
    
    
    $
    11,383
    
    
    $
    17,840
    
    
    $
    9,883
    
    
    $
    334
    
    
    $
    47,491
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalSix Months Ended June 30, 2006:Enterprise
    
    $
    5,460
    
    
    $
    11,876
    
    
    $
    26,330
    
    
    $
    10,290
    
    
    $
    264
    
    
    $
    54,220Postilion
    
    
    6,952
    
    
    
    9,978
    
    
    
    5,241
    
    
    
    13,207
    
    
    
    581
    
    
    
    35,959Total
    
    $
    12,412
    
    
    $
    21,854
    
    
    $
    31,571
    
    
    $
    23,497
    
    
    $
    845
    
    
    $
    90,179
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalSix Months Ended June 30, 2005:Enterprise
    
    $
    7,173
    
    
    $
    12,335
    
    
    $
    31,230
    
    
    $
    8,144
    
    
    $
    338
    
    
    $
    59,220Postilion
    
    
    10,456
    
    
    
    10,648
    
    
    
    4,991
    
    
    
    11,403
    
    
    
    299
    
    
    
    37,797Total
    
    $
    17,629
    
    
    $
    22,983
    
    
    $
    36,221
    
    
    $
    19,547
    
    
    $
    637
    
    
    $
    97,017
 17




---



##### Table of Contents



Three Months Ended June 30, 2006Enterprise
    
    
    Postilion
    
    
    TotalRevenues
    
    $
    28,330
    
    
    $
    18,409
    
    
    $
    46,739Operating expenses:Direct costs
    
    
    14,148
    
    
    
    8,567
    
    
    
    22,715Selling and marketing
    
    
    3,010
    
    
    
    3,673
    
    
    
    6,683Product development
    
    
    7,890
    
    
    
    1,986
    
    
    
    9,876General and administrative
    
    
    3,376
    
    
    
    3,103
    
    
    
    6,479Restructuring costs
    
    
    330
    
    
    
    219
    
    
    
    549Depreciation
    
    
    1,276
    
    
    
    695
    
    
    
    1,971Amortization of other intangible assets
    
    
    103
    
    
    
    224
    
    
    
    327Total operating expenses
    
    
    30,133
    
    
    
    18,467
    
    
    
    48,600Segment operating loss
    
    $
    (1,803
    )
    
    $
    (58
    )
    
    $
    (1,861
    )
 Three Months Ended June 30, 2005Enterprise
    
    
    Postilion
    
    
    TotalRevenues
    
    $
    28,550
    
    
    $
    18,941
    
    
    $
    47,491Operating expenses:Direct costs
    
    
    13,429
    
    
    
    8,123
    
    
    
    21,552Selling and marketing
    
    
    4,490
    
    
    
    3,640
    
    
    
    8,130Product development
    
    
    8,657
    
    
    
    1,571
    
    
    
    10,228General and administrative
    
    
    2,852
    
    
    
    3,168
    
    
    
    6,020Depreciation
    
    
    1,554
    
    
    
    821
    
    
    
    2,375Amortization of other intangible assets
    
    
    103
    
    
    
    225
    
    
    
    328Total operating expenses
    
    
    31,085
    
    
    
    17,548
    
    
    
    48,633Segment operating (loss) income
    
    $
    (2,535
    )
    
    $
    1,393
    
    
    $
    (1,142
    )
 Six Months Ended June 30, 2006Enterprise
    
    
    Postilion
    
    
    TotalRevenues
    
    $
    54,220
    
    
    $
    35,959
    
    
    $
    90,179Operating expenses:Direct costs
    
    
    27,144
    
    
    
    17,023
    
    
    
    44,167Selling and marketing
    
    
    5,650
    
    
    
    6,908
    
    
    
    12,558Product development
    
    
    15,749
    
    
    
    3,734
    
    
    
    19,483General and administrative
    
    
    6,284
    
    
    
    5,911
    
    
    
    12,195Restructuring costs
    
    
    638
    
    
    
    244
    
    
    
    882Depreciation
    
    
    2,365
    
    
    
    1,358
    
    
    
    3,723Amortization of other intangible assets
    
    
    206
    
    
    
    448
    
    
    
    654Total operating expenses
    
    
    58,036
    
    
    
    35,626
    
    
    
    93,662Segment operating (loss) income
    
    $
    (3,816
    )
    
    $
    333
    
    
    $
    (3,483
    )
 18




---



##### Table of Contents



Six Months Ended June 30, 2005Enterprise
    
    
    Postilion
    
    
    TotalRevenues
    
    $
    59,220
    
    
    $
    37,797
    
    
    $
    97,017Operating expenses:Direct costs
    
    
    27,553
    
    
    
    15,665
    
    
    
    43,218Selling and marketing
    
    
    8,177
    
    
    
    6,887
    
    
    
    15,064Product development
    
    
    17,842
    
    
    
    3,550
    
    
    
    21,392General and administrative
    
    
    5,884
    
    
    
    6,767
    
    
    
    12,651Depreciation
    
    
    3,037
    
    
    
    1,656
    
    
    
    4,693Amortization of other intangible assets
    
    
    206
    
    
    
    451
    
    
    
    657Total operating expenses
    
    
    62,699
    
    
    
    34,976
    
    
    
    97,675Segment operating (loss) income
    
    $
    (3,479
    )
    
    $
    2,821
    
    
    $
    (658
    )
  11. NET (LOSS) INCOME PER COMMON SHARE
    19




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except per share data)Basic earnings per share:(Loss) income from continuing operations
    
    $
    (1,084
    )
    
    $
    (283
    )
    
    $
    (1,888
    )
    
    $
    28Amount allocated to participating preferred stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Loss) income from continuing operations
available to common stockholders  basic
    
    $
    (1,084
    )
    
    $
    (283
    )
    
    $
    (1,888
    )
    
    $
    28Weighted average common shares outstanding
    
    
    70,959
    
    
    
    70,191
    
    
    
    70,692
    
    
    
    70,391Basic (loss) income from continuing operations per share
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    0.00Diluted earnings per share:(Loss) income from continuing operations
    
    $
    (1,084
    )
    
    $
    (283
    )
    
    $
    (1,888
    )
    
    $
    28Amount allocated to participating preferred stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Loss) income from continuing operations
available to common stockholders  diluted
    
    $
    (1,084
    )
    
    $
    (283
    )
    
    $
    (1,888
    )
    
    $
    28Weighted average common shares outstanding
    
    
    70,959
    
    
    
    70,191
    
    
    
    70,692
    
    
    
    70,391Weighted average effect of common stock equivalentStock options
    
    
    289
    
    
    
    681
    
    
    
    201
    
    
    
    1,179Convertible preferred stock
    
    
    1,070
    
    
    
    1,070
    
    
    
    1,070
    
    
    
    Weighted average diluted shares outstanding
    
    
    72,318
    
    
    
    71,942
    
    
    
    71,963
    
    
    
    71,570Diluted (loss) income from continuing operations per share
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    0.00
 20




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
      21




---



##### Table of Contents



Recent
Developments
   Recent Accounting Pronouncements
   22




---



##### Table of Contents



Critical Accounting Policies and Estimates
  Determination of the fair value of employee stock options.
 Comparison of the Three Months Ended June 30, 2006 and 2005
 Revenues.
 Software
    
    
    Support and
    
    
    ProfessionalLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Data Center
    
    
    Other
    
    
    TotalThree Months Ended June 30, 2006:Enterprise
    
    $
    2,591
    
    
    $
    6,353
    
    
    $
    14,207
    
    
    $
    5,079
    
    
    $
    100
    
    
    $
    28,330Postilion
    
    
    3,778
    
    
    
    4,844
    
    
    
    2,743
    
    
    
    6,832
    
    
    
    212
    
    
    
    18,409Total
    
    $
    6,369
    
    
    $
    11,197
    
    
    $
    16,950
    
    
    $
    11,911
    
    
    $
    312
    
    
    $
    46,739
 Software
    
    
    Support and
    
    
    ProfessionalLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Data Center
    
    
    Other
    
    
    TotalThree Months Ended June 30, 2005:Enterprise
    
    $
    3,675
    
    
    $
    5,944
    
    
    $
    15,004
    
    
    $
    3,838
    
    
    $
    89
    
    
    $
    28,550Postilion
    
    
    4,376
    
    
    
    5,439
    
    
    
    2,836
    
    
    
    6,045
    
    
    
    245
    
    
    
    18,941Total
    
    $
    8,051
    
    
    $
    11,383
    
    
    $
    17,840
    
    
    $
    9,883
    
    
    $
    334
    
    
    $
    47,491
  23




---



##### Table of Contents



Direct Costs.
 24




---



##### Table of Contents



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) Benefit.
  
    
    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; 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.
   (Loss) income from discontinued operations.
 
    
    presented the total assets of the Risk and Compliance business on one line as assets
held for sale in our consolidated balance sheet as of June 30, 2006;
    
    presented the total liabilities of the Risk and Compliance business on one line as
liabilities of business held for sale in our consolidated balance sheet as of June 30,
2006;
    
    presented the results of operations for the Risk and Compliance business as (loss)
income from discontinued operations, net of tax on one line in our consolidated statements
of operations for all periods presented; and
    
    ceased depreciation of fixed assets and amortization of intangible assets associated
with the Risk and Compliance business from July 1, 2006 forward;
    
    Removed the Risk and Compliance business from segment results.
   
    
    authorized management has committed to a plan to sell the business;
    
    the business is available for immediate sale in its present condition;
    
    an active program to locate a buyer and other actions required to complete the plan to sell have been initiated;
    
    the sale of the business is probable and expected to be complete within one year;
    
    the business is being actively marketed for sale at a price that is reasonable in
relation to its current fair value; and
    
    actions required to complete the plan indicate that it is unlikely that significant
changes to the plan will be made or that the plan will be withdrawn.
 26




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##### Table of Contents



Three Months Ended June 30,2006
    
    
    2005(Loss) income from Risk and Compliance
    
    $
    (1,019
    )
    
    $
    2,175Loss from Davidge
    
    
    
    
    
    
    (31
    )Income from Edify
    
    
    
    
    
    
    599Income tax expense
    
    
    (8
    )
    
    
    (144
    )Total
    
    $
    (1,027
    )
    
    $
    2,599
 Comparison of the Six Months Ended June 30, 2006 and 2005
 Revenues.
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalSix Months Ended June 30, 2006:Enterprise
    
    $
    5,460
    
    
    $
    11,876
    
    
    $
    26,330
    
    
    $
    10,290
    
    
    $
    264
    
    
    $
    54,220Postilion
    
    
    6,952
    
    
    
    9,978
    
    
    
    5,241
    
    
    
    13,207
    
    
    
    581
    
    
    
    35,959Total
    
    $
    12,412
    
    
    $
    21,854
    
    
    $
    31,571
    
    
    $
    23,497
    
    
    $
    845
    
    
    $
    90,179
 Software
    
    
    Support and
    
    
    Professional
    
    
    DataLicenses
    
    
    Maintenance
    
    
    Services
    
    
    Center
    
    
    Other
    
    
    TotalSix Months Ended June 30, 2005:Enterprise
    
    $
    7,173
    
    
    $
    12,335
    
    
    $
    31,230
    
    
    $
    8,144
    
    
    $
    338
    
    
    $
    59,220Postilion
    
    
    10,456
    
    
    
    10,648
    
    
    
    4,991
    
    
    
    11,403
    
    
    
    299
    
    
    
    37,797Total
    
    $
    17,629
    
    
    $
    22,983
    
    
    $
    36,221
    
    
    $
    19,547
    
    
    $
    637
    
    
    $
    97,017
   27




---



##### Table of Contents



Direct Costs.
    28




---



##### Table of Contents



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.
  (Loss) income from discontinued operations.
 29




---



##### Table of Contents



Six Months Ended June 30,2006
    
    
    2005(Loss) income from Risk and Compliance
    
    $
    (1,257
    )
    
    $
    2,659Loss from Davidge
    
    
    
    
    
    
    (31
    )Income from Edify
    
    
    
    
    
    
    631Gain on disposal of Edify
    
    
    554
    
    
    
    Income tax benefit (expense)
    
    
    36
    
    
    
    (251
    )Total
    
    $
    (667
    )
    
    $
    3,008
 Liquidity and Capital Resources
  Six Months Ended June 30,2006
    
    
    2005(In thousands)Net cash provided by operating activities before
changes in operating assets and liabilities
    
    $
    8,091
    
    
    $
    11,657Change in operating assets and liabilities
    
    
    (11,811
    )
    
    
    (9,754
    )Net cash (used in) provided by operating activities
    
    
    (3,720
    )
    
    
    1,903Net cash (used in) provided by investing activities
    
    
    (6,223
    )
    
    
    9,400Net cash provided by (used in) financing activities
    
    
    4,018
    
    
    
    (4,071
    )Effect of exchange rates on cash and cash equivalents
    
    
    44
    
    
    
    (474
    )Net (decrease) increase in cash and cash equivalents
    
    $
    (5,881
    )
    
    $
    6,758
 As ofJune 30, 2006
    
    
    December 31, 2005(In thousands)Cash and cash equivalents
    
    $
    79,227
    
    
    $
    85,108Short term investments
    
    
    32,337
    
    
    
    44,170Working capital
    
    
    110,165
    
    
    
    106,250Total assets
    
    
    339,618
    
    
    
    344,523Total stockholders equity
    
    
    254,370
    
    
    
    252,386
 Operating Activities.
  
    
    our net loss of $2.6 million;
    
    depreciation and amortization expense of $6.5 million;
    
    gain on the disposal of Edify of $0.6 million;
    
    provision of doubtful accounts receivable and billing adjustments of $1.9 million;
    
    stock based compensation expense of $2.8 million;
    
    a decrease in accrued expenses and other liabilities of $9.7 million;
    
    an increase of $13.8 million in accounts receivable due to the timing of revenue
recognized and billing terms on fixed price implementation projects during the quarter;
    
    a $11.1 million increase in deferred revenues resulting from annual billing of
maintenance and subscription fees; and
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
    
    changes in other operating assets and liabilities of $0.6 million.
  
    
    our net income of $3.0 million;
    
    depreciation and amortization expense of $7.6 million;
    
    provision of doubtful accounts receivable and billing adjustments of $1.0 million;
    
    a decrease in accrued expenses and other liabilities of $14.5 million, approximately
$4.7 million related to the payment of annual expenses, including annual employee
bonuses and incentive pay;
    
    an increase of $4.4 million in accounts receivable due to the timing of revenue
recognized and billing terms on fixed price implementation projects during the quarter
    
    a $8.3 million increase in deferred revenues resulting from annual billing of
maintenance and subscription fees; and
    
    changes in other operating assets and liabilities of $0.8 million.
 Investing Activities.
  
    
    paid $14.0 million to the sellers of Mosaic in settlement of the earn-out;
    
    converted $11.8 million, net, from short-term investments to cash and cash equivalents;
    
    received $0.6 million working capital adjustment from the sale of Edify; and
    
    purchased $4.6 million of property and equipment.
  
    
    converted $12.6 million, net, from cash and cash equivalents to short-term investments; and
    
    purchased $3.2 million of property and equipment.
 Financing Activities.
  
    
    received $2.3 million from the sale of common stock under our employee stock option plans; and
    
    received $2.5 million from a sale lease back transaction ; and
    
    paid $0.8 million for capital lease obligations.
  
    
    received $0.3 million from the sale of common stock under our employee stock option plans; and
    
    repurchased $3.4 million of our common stock; and
    
    paid $1.0 million for capital lease obligations.
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
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Item 4. Controls and Procedures
 Evaluation of Disclosure Controls.
 Changes in Internal Control over Financial Reporting.
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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
   
 Item 1A. Risk Factors
  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 transition from selling our financial institutions products on a
perpetual license to a term or subscription license, we cannot accurately
predict how long it will take to complete this transition or 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;§
    
    the length of our sales cycle to large financial
organizations generally lasts from six to eighteen
months, which adds an element of uncertainty to our
ability to forecast revenues;§
    
    if we fail to introduce 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 consumer 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.
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In 2006, we will depend on one customer, State Farm, for a significant portion of our revenue and
if that customer terminates its contract with us, our revenues and financial performance would
decline
  Our exploration of strategic alternatives may create uncertainties that could affect our business
    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;§
    
    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 have experienced substantial losses in the past and may not achieve or maintain profitable
operations in the future
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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, 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;§
    
    the quality of the development efforts undertaken offshore may not meet our requirements because of language, cultural
and experiential 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.
 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.
  Our operating results would suffer if we were subject to a protracted infringement claim or a
significant damage award.
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§
    
    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§
    
    the loss of key employees and diversion of the attention of management from other ongoing business concerns.
 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
  Market volatility may affect the price of our common stock
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§
    
    actual or anticipated variations in our quarterly operating results;§
    
    21% of our common stock is owned by 5 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;§
    
    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
  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;
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§
    
    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
  We are subject to government regulation
  The adoption or modification of laws or regulations relating to the Internet, or interpretations of
existing law, could adversely affect our business
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Item 4. Submission of Matters to a Vote of Security Holders
 (a)
    
    S1s 2006 annual meeting of shareholders was held on June 29, 2006.(b)
    
    John W. Spiegel and Thomas P. Johnson, Jr. were re-elected as directors at the 2006 annual
meeting. Continuing directors include James S. Mahan, III, M. Douglas Ivester, Ram Gupta,
Gregory J. Owens and Jeffrey C. Smith.(c)
    
    The election of two directors for three-year terms was voted on and approved by S1s
shareholders at the 2006 annual meeting of shareholders held on June 29, 2006.The results of the voting by shareholders at the annual meeting were as follows:
 Against/Director Nominee
    
    For
    
    Withheld
    
    Broker Non-VotesJohn W. Spiegel
    
    
    58,982,743
    
    
    
    1,411,610
    
    
    
    -0-Thomas P. Johnson, Jr.
    
    
    59,235,329
    
    
    
    1,159,024
    
    
    
    -0-
 (d)
    
    On May 3, 2006, Company entered into a settlement agreement (the Settlement
Agreement) with Starboard Value and Opportunity Master Fund Ltd., Ramius Master Fund, Ltd, Ramius
Fund III, Ltd., Parche, LLC, RCG Ambrose Master Fund, Ltd., RCG Halifax Fund, Ltd., C4S & Co.,
L.L.C., Admiral Advisors, LLC, Ramius Advisors, LLC, Ramius Capital Group, L.L.C., Morgan B. Stark,
Peter A. Cohen, Jeffrey M. Solomon, Thomas W. Strauss, Barington Companies Equity Partners, L.P.,
James A. Mitarotonda, Barington Companies Investors, LLC, Barington Companies Offshore Fund, Ltd.
(BVI), Barington Investments, L.P., Barington Companies Advisors, LLC, Barington Capital Group,
L.P., LNA Capital Corp., Arcadia Partners, L.P., Arcadia Capital Management, LLC, William J. Fox,
Jeffrey C. Smith, Jeffrey Glidden, Richard Rofe, Edward Terino and John Mutch (collectively, the
Ramius Group).Pursuant to the Settlement Agreement, the Company agreed to convene a meeting
of its Board of Directors (the Board) no later than the first business day
after execution of the Settlement Agreement, which meeting was held on May 3,
2006, to take the following actions:
 
    
    fix the size of the Board at seven members;
    
    appoint Jeffrey Smith, managing director or Ramius Capital
Group, L.L.C., to the Board. Mr. Smiths term expires at the 2008
Annual Meeting of Stockholders;
    
    nominate Messrs. Thomas Johnson and John Spiegel to stand for
election as directors at the 2006 Annual Meeting of Stockholders;
    
    set a record date of 21 business days after the Board meeting for
the 2006 Annual Meeting of Stockholders, at which the only matter to be
presented by the SI Board to the stockholders will be the election of
Messrs. Johnson and Spiegel;
    
    adopt an amendment to Section 2.3 of the Companys bylaws to allow
stockholders holding at least 1/10th of the outstanding
common stock to call a special meeting of stockholders; and
    
    explore strategic alternatives available to the Company to maximize
stockholder value.
 The Company also agreed in the Settlement Agreement not to do any of the
following from the date of execution of the Settlement Agreement through
September 30, 2006:
 
    
    present any proposals to the stockholders, other than the election
of Messrs. Johnson and Spiegel at the 2006 Annual Meeting of
Stockholders and any proposals that may be necessary in furtherance of
a strategic alternative;
    
    take any action to amend the Companys bylaws, except for the
amendment to Section 2.3 of the Companys bylaws described
above; and
    
    take any action to increase the size of the Board to more than seven members.
 Pursuant to the Settlement Agreement, the Ramius Group agreed:
 
    
    to support the election of Messrs. Johnson and Spiegel to the
Board and to vote the Ramius Groups shares in favor of such
candidates;
    
    not to solicit authority from any of the Companys stockholders to
vote in favor of any proposal at the 2006 annual meeting of stockholders,
other than the election of Messrs. Johnson and Spiegel to the Board and
any other proposals by the Board;
    
    not engage in any campaign against Messrs. Johnson and Spiegel in
connection with the 2006 Annual Meeting of Stockholders or cause or
assist any other party to do; and
    
    to rescind (i) the nominations and proposals for the 2006 Annual
Stockholders Meeting and (ii) the demand to inspect certain books and
records of the Company.
 Also, from the date of execution of the Settlement Agreement through
September 30, 2006 the Ramius Group agreed:
 
    
    not engage in any solicitation of proxies or consents, or have
others do so, except in support of Board-approved proposals; provided
that the Ramius Group may announce its opposition to any Board-approved
stockholder proposals not supported by Director Smith;
    
    amend the Schedule 13D (filed on April 6, 2006 filed by Ramius Capital Group, LLC,
together with certain other reporting persons) to indicate that they are ending
the proxy battle; and
    
    not form, join or in any way participate in any group with respect to any
voting securities, other than a group that includes all or some lesser number of
the persons identified as part of the Ramius Group, but does not include any other
members who are not currently identified as Ramius Group members as of the date
hereof.
 The Company will reimburse the Ramius Group up to $87,500 for its reasonable, documented
out-of-pocket fees and expenses incurred in connection with its dispute with the Company
relative to the nomination of directors to the Companys Board at the 2006
annual meeting of stockholders.The Company estimates that it has incurred additional costs of $0.8 million, including
amounts to be paid to the Ramius Group under the Settlement Agreement, in connection with
the 2006 annual meeting, excluding the amount of such costs normally expended for a
solicitation for an election of directors in the absence of a contest and excluding
salaries and wages of regular employees and officers of the Company.The foregoing summary is qualified in its entirety by the detailed provisions of the
Settlement Agreement, a copy of which is attached as Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the Securities and Exchange Commission on May 9,
2006, and incorporated by reference herein.
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Item 6. Exhibits
 ExhibitNo.
    
    Exhibit Description10.1
    
    S1 Corporation Change in Control Severance Plan*31.1
    
    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
 
 *
    
    Management contract or compensatory plan 41




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SIGNATURE
  S1 CORPORATIONBy:
    /s/ JOHN A. STONEJohn A. StoneChief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer) 42




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Exhibit Index
 ExhibitNo.
    
    Exhibit Description10.1
    
    S1 Corporation Change in Control Severance Plan*31.1
    
    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
 
 *
    
    Management contract or compensatory plan 43